tailieunhanh - Lecture Economics (19/e) - Chapter 7: Businesses and the costs of production

After reading chapter 7, you should be able to: Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs; relate the law of diminishing returns to a firm’s short-run production costs; describe the distinctions between fixed and variable costs and among total, average, and marginal costs; use economies of scale to link a firm’s size and its average costs in the long run. | Businesses and the Costs of Production 07 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Economic Costs The payment that must be made to obtain and retain the services of a resource Explicit Costs Monetary payments Implicit Costs Value of next best use Self-owned resources Includes normal profit LO1 7- Accounting Profit and Normal Profit 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 LO1 7- Economic Profit LO1 Explicit costs Accounting costs (explicit costs only) Implicit costs (including a normal profit) Economic profit Accounting profit Economic (Opportunity) Costs Total Revenue 7- Short Run and Long Run Short Run Some variable inputs Fixed plant Long Run All inputs are variable Variable plant Firms enter and exit LO1 7- Short-Run Production Relationships Total Product (TP) Marginal Product (MP) Average Product (AP) LO2 Marginal Product Change in Total Product Change in Labor Input = Average Product Total Product Units of Labor = 7- The Law of Diminishing Returns LO2 TP MP AP Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns 1 2 3 4 5 6 7 8 9 0 10 20 30 Total Product, TP 1 2 3 4 5 6 7 8 9 20 10 Marginal Product, MP 7- Short-Run Production Costs Fixed Costs (TFC) Costs do not vary with output Variable Costs (TVC) Costs vary with output Total Costs (TC) Sum of TFC and TVC TC = TFC + TVC LO3 7- Short-Run Production Costs LO3 Costs 1 2 3 4 5 6 7 8 9 10 0 Q 100 200 300 400 500 600 700 800 900 1000 $1100 TFC TC TVC Total Cost Variable Cost Fixed Cost 7- Per-Unit, or Average, Costs Average Fixed Costs AFC = TFC/Q Average Variable Costs AVC = TVC/Q Average Total Costs ATC = TC/Q Marginal Costs MC = ΔTC/ΔQ LO3 7- Per-Unit, or Average, Costs LO3 Costs 1 2 3 4 5 6 7 8 9 10 0 Q 50 100 150 $200 AFC ATC AVC AVC AFC 7- Marginal Cost LO3 Costs 1 2 3 4 5 6 7 8 9 10 0 Q 50 100 150 $200 AFC MC ATC AVC AVC AFC 7- MC and Marginal Product LO3 MP AP MC AVC Quantity of Output Quantity of Labor Production Curves Cost Curves 7- Long-Run Production Costs The firm can change all input amounts, including plant size. All costs are variable in the long run. Long run ATC Different short run ATCs LO4 7- The Long-Run Cost Curve LO4 Long-Run ATC Average Total Costs ATC-1 ATC-2 ATC-3 ATC-4 ATC-5 Output 7- Economies and Diseconomies of Scale Economies of scale Labor specialization Managerial specialization Efficient capital Other factors Constant returns to scale LO4 7- Economies and Diseconomies of Scale Diseconomies of scale Control and coordination problems Communication problems Worker alienation Shirking LO4 7- 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 LO4 7- MES and Industry Structure LO4 Output Average Total Costs Long-Run ATC Economies Of Scale Constant Returns To Scale Diseconomies Of Scale q1 q2 7- Don’t Cry Over Sunk Costs Sunk costs Costs have already been incurred and thus are irrecoverable Rule: Do not engage in any activity where MB 7-