Chapter 8 Flashcards
ECONOMIC COSTS
The payment that must be made to obtain and retain the
services of a resource
Explicit Costs
Monetary payments
- opportunity cost
Implicit Costs
- Value of next best use
– Self-owned resources
– Includes normal profit - opportuninty cost
Accounting profit
= Revenue – Explicit Costs
Economic profit
= Accounting Profit – Implicit Costs
Economic profit (to summarize)
=Total Revenue – Economic Costs
=Total Revenue – Explicit Costs – Implicit Costs
Short Run
– FixedPlant
- A period too brief to alter its capacity, yet long enough to change the degree to which the current capacity is used.
Short Run
– Fixed Plant
- A period too brief to alter its capacity, yet long enough to change the degree to which the current capacity is used.
Long Run
Variable Plant
A period long enough to adjust the quantities of all factors,
including plant capacity.
Marginal Product (MP)
= chnage in total prooduct / chnage in labour input
average product AP
average prod = total product / units of labour
LAW OF DIMINISHING RETURNS
As successive units of a variable factor (say labour) are added to a fixed factor beyond some point the marginal product that can be attributed to each additional unit of the variable factor will decline.
Fixed Costs (TFC)
Costs that do not vary with output
Variable Costs (TVC)
Costs that vary with output
Total Costs (TC)
Sum of TFC and TVC
TC = TFC + TVC
Average Fixed Costs
AFC = TFC/Q
Average Variable Costs
AVC = TVC/Q
Average Total Costs
ATC = TC/Q
Marginal Costs
MC = ΔTC/ΔQ
Marginal Costs
MC = ΔTC/ΔQ
RELATION OF MC TO AVC AND ATC
When MC < current ATC
ATC will fall
RELATION OF MC TO AVC AND ATC
When MC > current ATC
ATC will rise
RELATION OF MC TO AVC AND ATC
intersection
MC intersects ATC and AVC at minimum points
LONG-RUN PRODUCTION COSTS
- In the long run firms can undertake all desired input
adjustments. - What will costs look like when the firm can choose the best plant size for any given situation?
- For every plant capacity size, there is a short-run ATC curve
- All such plant capacities can be plotted.
long run graph key points
THE LONG-RUN AVERAGE-TOTAL-COST CURVE: FIVE POSSIBLE PLANT SIZES
- The long-run average-total-cost curve is made up of segments of the short-run cost curves
- Each point on the planning curve shows the least unit cost attainable for any output when the firm has had time to make all desired changes in its plant size.
THELONG-RUNAVERAGE-TOTAL-COSTCURVE: UNLIMITED NUMBER OF PLANT SIZES
key points
- If the number of possible plant sizes is very large, the long-run average- total-cost curve approximates a smooth curve.
- Economies of scale, followed by diseconomies of scale, cause the curve to be U-shaped.
ECONOMIES AND DISECONOMIES OF SCALE
economies of scale
As plant size increases, a number of factors will for a time
lead to lower average costs of production.
– Labour specialization
– Managerial specialization
– Efficient capital
– Other factors
ECONOMIES AND DISECONOMIES OF SCALE
Constant returns to scale
In this range ATC is constant.
ECONOMIES AND DISECONOMIES OF SCALE
Diseconomies of scale
In time the expansion of a firm may lead to higher average
total costs.
– Control and coordination problems
– Communication problems
– Worker Alienation
– Shirking
MES AND INDUSTRY STRUCTURE
Economies and diseconomies of scale are an important determinant of an industry’s structure.
MES AND INDUSTRY STRUCTURE
Minimum Efficient Scale (MES):
Lowest level of output where long-run average costs are
minimized
– Can determine the structure of the industry:
– Many producers or few producers and if they will be large, small, or different sizes
