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LESSON 5.3 Production and Cost

Objectives. LESSON 5.3 Production and Cost. Understand how marginal product varies as a firm employs more labor in the short run. Explain the shape of the firm’s marginal cost curve and identify what part of that is the firm’s supply curve.

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LESSON 5.3 Production and Cost

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  1. Objectives LESSON 5.3Production and Cost Understand how marginal product varies as a firm employs more labor in the short run. Explain the shape of the firm’s marginal cost curve and identify what part of that is the firm’s supply curve. Distinguish between economies of scale and diseconomies of scale in the long run. CONTEMPORARY ECONOMICS: LESSON 5.3

  2. Key Terms LESSON 5.3Production and Cost short run long run total product marginal product law of diminishing returns fixed cost variable cost • total cost • marginal cost • marginal revenue • competitive firm’s supply curve • economies of scale • long-run average curve cost CONTEMPORARY ECONOMICS: LESSON 5.3

  3. Production in the Short Run • Fixed and variable resources • Increasing returns • Law of diminishing returns • Marginal product curve CONTEMPORARY ECONOMICS: LESSON 5.3

  4. Marginal Product of Labor CONTEMPORARY ECONOMICS: LESSON 5.3

  5. Costs in the Short Run • Fixed and variable costs • Total cost • Marginal cost • Marginal cost curve • Marginal revenue • Short-run losses and shutting down • The firm’s supply curve CONTEMPORARY ECONOMICS: LESSON 5.3

  6. Marginal Cost Curve for Hercules At Your Service CONTEMPORARY ECONOMICS: LESSON 5.3

  7. Supply Curve for Hercules At Your Service CONTEMPORARY ECONOMICS: LESSON 5.3

  8. Production and Costs in the Long Run • Economies of scale • Diseconomies of scale • Long-run average cost curve CONTEMPORARY ECONOMICS: LESSON 5.3

  9. Economies of Scale • Economies of scale—forces that reduce a firm’s average cost as the firm’s size, or scale, increases in the long run CONTEMPORARY ECONOMICS: LESSON 5.3

  10. Diseconomies of Scale • If the firm’s long-run average cost increases as production increases, this reflects diseconomies of scale CONTEMPORARY ECONOMICS: LESSON 5.3

  11. Long-Run Average Cost Curve • Long-run average cost curve shows the lowest average cost of producing each level of output CONTEMPORARY ECONOMICS: LESSON 5.3

  12. A Firm’s Long-Run Average Cost Curve CONTEMPORARY ECONOMICS: LESSON 5.3

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