1 / 27

Businesses and the Costs of Production - Understanding Economic Costs and Firm Size

This chapter explores economic costs, accounting profit, short run and long run production relationships, the law of diminishing returns, short run production costs, per-unit costs, long run production costs, economies and diseconomies of scale, and applications and illustrations of production costs.

sbriggs
Download Presentation

Businesses and the Costs of Production - Understanding Economic Costs and Firm Size

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 9 Businesses and the Costs of Production

  2. Economic Costs • Economic cost • The payment that must be made to obtain and retain the services of a resource • Explicit costs • Monetary outlay • Implicit costs • Opportunity cost of using self-owned resources • Includes a normal profit LO1

  3. Accounting Profit and Normal Profit • Accounting profit = Revenue - explicit costs • Economic profit = Accounting profit - implicit costs • Economic profit (to summarize) = Revenue - economic costs = Revenue - explicit costs - implicit costs LO1

  4. Economic Profit Economic profit Accounting profit Implicit costs (including a normal profit) Total revenue Economic (opportunity) costs Explicit costs Accounting costs (explicit costs only) LO1

  5. Short Run and Long Run • Short run • Some variable inputs • Fixed plant • Long run • All inputs are variable • Firms can adjust plant size as well as enter and exit industry LO2

  6. change in total product total product = = Marginal product Average product change in labor input units of labor Short Run Production Relationships • Total product (TP) • Marginal product (MP) • Average product (AP) LO2

  7. Law of Diminishing Returns • Law of diminishing returns • Resources are of equal quality • Technology is fixed • Variable resources are added to fixed resources • At some point, marginal product will fall • Rationale LO2

  8. The Law of Diminishing Returns Continued

  9. The Law of Diminishing Returns Concluded 30 TP 20 Total product, TP 10 0 1 2 3 4 5 6 7 8 9 Increasing Marginal Returns Negative Marginal Returns Diminishing Marginal Returns 20 Marginal product, MP 10 AP 1 2 3 4 5 6 7 8 9 MP LO2

  10. Short Run Production Costs • Fixed costs (TFC) • Costs that do not vary with output • Variable costs (TVC) • Costs that do vary with output • Total cost (TC) • Sum of TFC and TVC • TC = TFC + TVC LO3

  11. $1100 1000 900 800 700 600 Costs 500 400 300 200 100 0 10 1 2 3 4 5 6 7 8 9 Q Short Run Cost Curves TC TVC Fixed cost Total cost Variable cost TFC LO3

  12. Per-Unit, or Average, Costs • Average fixed cost AFC = TFC/Q • Average variable cost AVC = TVC/Q • Average total cost ATC = TC/Q • Marginal cost MC = ΔTC/ΔQ LO3

  13. Short Run Cost Schedules LO3

  14. $200 150 100 Costs 50 0 10 1 2 3 4 5 6 7 8 9 Q Average Cost Curves ATC AVC AFC AVC AFC LO3

  15. $200 150 100 Costs 50 0 10 1 2 3 4 5 6 7 8 9 Q Marginal Cost MC ATC AVC AFC AVC AFC LO3

  16. Average product and marginal product AP MP Quantity of labor MC AVC Cost (dollars) Cost curves Quantity of output Marginal Cost and Marginal Product LO3

  17. 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 • Now consider costs in terms of average total costs LO4

  18. Firm Size and Costs ATC-1 ATC-2 ATC-4 ATC-5 ATC-3 Average total costs Output LO4

  19. The Long Run Cost Curve ATC-1 ATC-5 ATC-2 Long-run ATC ATC-4 ATC-3 Average total costs Output LO4

  20. Economies of Scale • Economies of scale • Labor specialization • Managerial specialization • Efficient capital • Other factors • Constant returns to scale LO4

  21. Diseconomies of Scale • Diseconomies of scale • Control and coordination problems • Communication problems • Worker alienation • Shirking LO4

  22. Minimum Efficient Scale • Minimum efficient scale (MES) • Lowest level of output at which long run average costs are minimized • Can determine the structure of the industry • Natural monopoly • Long run costs are minimized when only one firm produces the product LO4

  23. MES and Industry Structure Diseconomies of scale Constant returns to scale Economies of scale Average total costs Long-run ATC q1 q2 Output LO4

  24. MES and Industry Structure Continued Economies of scale Diseconomies of scale Average total costs Long-run ATC Output LO4

  25. MES and Industry Structure Concluded Diseconomies of scale Economies of scale Average total costs Long-run ATC Output LO4

  26. Applications and Illustrations • Rising gasoline prices • Successful start-up firms • Verson stamping machine • The daily newspaper • Aircraft and concrete plants LO5

  27. 3D Printers and Mass Customization • First industrial revolution began in 1700s • Mass production led to mass affordability • Second industrial revolution began late 1800s • Mass sales were necessary to spread R&D costs • Third industrial revolution beginning now • Affordable mass customization with zero transportation costs

More Related