Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production

Costs Minimum Efficient Scale and Industry Structure Last Word

Cha pter2 0

The Costs of Production

Ayesha Afzal Assistant Professor Lahore School of Economics

Key Terms End Show 20-1

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Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha pter2 0

Economic Costs
Economic Cost Opportunity Cost Explicit Costs Implicit Costs Normal Profit as a Cost Economic or Pure Profit
=
Total Revenue

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Economic Profit

Economic Cost

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Total Revenue

Economic (Opportunity) Costs

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Economic Short-Run Production Costs Profit Long-Run Production Costs Minimum Efficient Scale and Industry Structure Implicit Costs Last Word (Including a Normal Profit)

Cha pter2 0

Profits Compared
Economic Profit Versus Accounting Profits
Economics Accounting
Accounting Profit

Explicit Costs

Accounting Costs (Explicit Costs Only)

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Short Run and Long Run Short Run: Fixed Plant Long Run: Variable Plant
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Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha pter2 0

Total Product (TP) Marginal Product (MP) Average Product (AP)

Short-Run Production Relationships

Change in Total Product Marginal Product = Change in Labor Input

Average Product
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Total Product Units of Labor

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha Law of Diminishing Returns pter2 Rationale 0

Example

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(1) Units of the (2) Variable Resource Total Product (Labor) (TP) 0 0 ] 10 1 25 ] 2 45 ] 3 60 ] 4 70 ] 5 75 ] 6 75 ] 7 70 ] 8

(3) Marginal Product (MP), Change in (2)/ Change in (1) 10 15 20 15 10 5 0 -5

Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns

(3) Average Product (AP), (2)/(1) 10.00 12.50 15.00 15.00 14.00 12.50 10.71 8.75

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Total Product, TP

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure 20 Last Word

Cha Law of Diminishing Returns pter2 Graphically 0 30

TP 10 0

Marginal Product, MP

Increasing Marginal 20 Returns

Diminishing Marginal Returns

Negative Marginal Returns

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10 1 2 3 4 5 6 7

AP 8 9 MP

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Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha Short-Run Production Costs pter2 0

Fixed Costs Variable Costs Total Cost TC = TFC + TVC

Key Terms End Show 20-7

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Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha Short-Run Production Costs pter2 Per-Unit or Average Costs Average Fixed Cost (AFC) 0 Average Variable Cost (AVC) Average Total Cost (ATC) Marginal Cost (MC)
TFC TVC AFC = AVC = Q Q TC = AFC + AVC ATC = Q Change in TC MC = Change in Q
20-8
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Key Terms End Show

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs 900 Long-Run Production Costs Minimum Efficient Scale and Industry Structure 800 Last Word

Cha Short-Run Production Costs pter2 Total Cost, Fixed and Variable Costs $1100 0 TC 1000
TVC
700

Costs

600 500 400 300 200 100

Fixed Cost Total Cost

Variable Cost TFC

Key Terms End Show 20-9

10

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Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure 150 Last Word

Cha Short-Run Production Costs pter2 Average and Marginal Costs $200 0
MC

Costs

AFC
100

ATC AVC

50

AVC
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AFC
0 1 2 3 4 5 6 7 8 9 10

Q
G 20.1

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Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha Short-Run Production Costs pter2 MC and Marginal Product 0 Marginal Decisions

Relation of MC to AVC and ATC Relationship Between Productivity Curves and Cost Curves Shifts in Cost Curves

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Graphically

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Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Average Product and Marginal Product

Cha Short-Run Production Costs Production Curves pter2 0

AP MP
Quantity of Labor

Cost Curves
Cost (Dollars)

MC

AVC

Key Terms End Show 20-12

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Quantity of Output

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha Long-Run Production Costs pter2 Firm Size and Costs 0 Long-Run Cost Curve

Economies of Scale
Labor Specialization Managerial Specialization Efficient Capital

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Diseconomies of Scale Constant Returns to Scale

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Average Total Costs

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns ATC-1 Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure ATC-2 Last Word

Cha Long-Run Production Costs pter2 Long-Run ATC Curve 0

ATC-5 ATC-3 ATC-4

Output
Key Terms End Show 20-14

Any Number of Short-Run Optimum Size Cost Curves Can Be Constructed

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Average Total Costs

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns ATC-1 Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure ATC-2 Last Word

Cha Long-Run Production Costs pter2 Long-Run ATC Curve 0

ATC-5 ATC-3 ATC-4

Long-Run ATC

Output
Key Terms End Show 20-15

The Long-Run ATC Curve Just Envelopes the Short Run ATCs
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Average Total Costs

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns ATC-1 Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure ATC-2 Last Word

Cha Long-Run Production Costs pter2 Long-Run ATC Curve 0

ATC-5 ATC-3 ATC-4

Long-Run ATC

Output
Key Terms End Show 20-16

The Long-Run ATC Curve Just Envelopes the Short Run ATCs
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Average Total Costs

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha Long-Run Production Costs pter2 Alternative Long-Run ATC Shapes Diseconomies Constant Returns Economies 0 Of Scale To Scale Of Scale

Long-Run ATC

q1 Output
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q2

Long-Run ATC Curve Where Economies Of Scale Exist

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Average Total Costs

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha Long-Run Production Costs pter2 Alternative Long-Run ATC Shapes Economies 0 Of Scale
Diseconomies Of Scale

Long-Run ATC
Output

Key Terms End Show 20-18

Long-Run ATC Curve Where Costs Are Lowest Only When Large Numbers Are Participating
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Average Total Costs

Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha Long-Run Production Costs pter2 Alternative Long-Run ATC Shapes Diseconomies Economies 0 Of Scale Of Scale
Long-Run ATC

Output
Key Terms End Show 20-19

Long-Run ATC Curve Where Economies Of Scale Exist, are Exhausted Quickly, And Turn Back Up Substantially
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Economic Costs Profits Compared Short-Run Production Relationships Law of Diminishing Returns Short-Run Production Costs Long-Run Production Costs Minimum Efficient Scale and Industry Structure Last Word

Cha pter2 0

Minimum Efficient Scale and Industry Structure Minimum Efficient Scale (MES) Natural Monopoly Applications and Illustrations
Rising Cost of Insurance and Security Successful Start-Up Firms The Verson Stamping Machine The Daily Newspaper Aircraft and Concrete Plants

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