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Chapter 6
Chapter 6
IMPLICIT COST
Value of input services that are used in production but not purchased in a ma
EXPLICIT COST
Value of resources purchased for production
COST OPPORTUNITY COST
CONCEPTS The value of a resource in its next best use
SOCIAL COST
Total cost of production of a good that
includes direct and indirect costs.
SUNK COST
The cost that a firm cannot recover from the expenditure it has ma
SHORT RUN
LONG RUN
Total cost (TC ) also defined as total fixed cost (TFC) plus
TC = TFC + TVC
ATC = TC
Q
TC = TVC + TFC
TFC
TOTAL FIXED COST (TFC)
The cost of inputs that is independent of output.
QUANTITY
MC ATC Q
AFC = TFC
AFC Q
QUANTITY
0 20 0 20 - - - -
1 20 15 35 20 15 35 15
2 20 25 45 10 12.50 22.50 10
3 20 30 50 6.67 10 16.67 5
4 20 35 55 5 8.75 13.75 5
5 20 45 65 4 9 13 10
SAVC
STAGE II
AFC continuous to decline and SATC will become minimum.
ATC remains constant at this stage since the falling effect of
AFC and rising effect of AVC is balanced.
.
STAGE III
The falling effect of AFC is lower than rising effect of AVC,
therefore ATC begins to increase.
SAFC
QUANITTY
ATC curve is “U-Shaped” because of the combined influences of AFC and AVC.
ATC
Quantity
ATC falling, MC curve lies below ATC curve.
ATC is at minimum point, ATC curve and MC curve are equal.
ATC starts to increase, MC curve lies above ATC curve.
Quantity
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 13
COST CURVES IN THE LONG
RUN
Long run is a period where there are only
variable factors and no fixed cost involved.
Long run total cost (LRTC) starts from origin
because of the absence of total fixed cost.
LONG RUN AVERAGE COST CURVE (LRAC)
Shows the minimum cost of producing any
given output when all of the inputs are variable.
Long run is a period where firms plan how to
minimize average cost.
COST
SRAC1
SRAC5
SRAC2 SRAC4
LRAC
SRAC3
QUANTITY
Quantity
PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 6– 16
LONG-RUN PRODUCTION
COST (cont.)
ECONOMIES OF SCALE
Advantages and benefits of a firm as it becomes larger and
larger.
Reduce long run average cost (LRAC).
Marketing economies, financial economies, labour economies,
technical economies, managerial economics.
DISECONOMIES OF SCALE
Problems faced by a firm as it becomes larger and larger.
Increase long run average cost (LRAC).
Mismanagement, competition, labour diseconomies.
INTERNAL
EXTERNAL
Internal economies happen inside an organization Advantages of the industry as a whole
INTERNAL EXTERNAL
Raise the cost of production of a firm as the The disadvantages faced by the industry
firm expands as a whole
MR = TR/ Q
Quantity
Price
15
AP, MP
10
5 AR=MR=DD
0
10 20 30 40 50
Price
15
AP, MP
10
AR=DD
5
MR Quantity
0
10 20 30 40 50