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University of Hawai‘i at Mānoa Department of Economics

University of Hawai‘i at Mānoa Department of Economics. ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #16 Thursday, March 4, 2004. ANNOUNCEMENTS. REVIEW SESSION Thursday, March 18, 2004, 4:30-5:30 PM BIL 152 MID-TERM EXAMINATION #2

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University of Hawai‘i at Mānoa Department of Economics

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  1. University of Hawai‘i at MānoaDepartment of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #16 Thursday, March 4, 2004

  2. ANNOUNCEMENTS • REVIEW SESSION • Thursday, March 18, 2004, 4:30-5:30 PM BIL 152 • MID-TERM EXAMINATION #2 • Tuesday, March 30, 2004, 12:00-1:15 PM BIL 152

  3. LECTURE 16 • Three Stages of Production • Cost Theory • Total Cost • Average Cost • Marginal Cost

  4. THREE STAGES OF SHORT-RUN PRODUCTION Q STAGE II • • STAGE I TP STAGE III • L Q/L APL L L1 L0 L2 MPL

  5. Production & Cost Data

  6. Short-Run Cost $ Total Variable Cost Q

  7. Short-Run Cost $ R1 R2 Total Variable Cost R3 A • TVC3 TVC2 Average Variable Cost is minimized here. TVC1 Q Q1 Q2 Q3 0

  8. Short-Run Total Variable Cost $ Marginal Cost is minimized here. Total Variable Cost Average Variable Cost is minimized here. A • B • QA QB 0 Q

  9. $ TVC R • T • Q $/Q MC AVC Q

  10. Total Cost = Total Fixed Cost + Total Variable Cost • TC = TFC + TVC • TC – TFC = TVC • TC - TVC = TFC • TC/Q = TFC/Q + TVC/Q • ATC = AFC + AVC • ATC – AFC = AVC • ATC – AVC = AFC

  11. $ TFC Q $/Q Average Fixed Cost Curve is a Rectangular Hyperbola. AFC Q

  12. TC TVC $ • R • T • TFC Q MC $/Q ATC AVC Q

  13. TC equals the area of rectangle 0CEQ*. TVC equals the area of rectangle 0BFQ*. $/Q TFC equals the area of rectangle 0AGQ* . TFC equals the area of rectangle BCEF. MC ATC AVC C• •E B• •F A• •G AFC 0 Q* Q

  14. TC= ? ; TVC = ? ; TFC = ? $/Q MC ATC B AVC A• • C E• • 0 D Q

  15. TC = ? TVC = ? TFC = ? $/Q MC ATC AVC C• •E B• •F AFC A• •G 0 Q* Q

  16. LECTURE 16 (cont.) • Economies of Scale (EOS) • Long-Run Costs

  17. Scale Effects • Long-Run v. Short-Run • Economies of Scale • Economies of Scope • Long Run Production Q = f ( K, L )

  18. Economies of Scale (EOS):An Example: circle with radius R Area=¶R2 R Circumference=2¶R

  19. Short-Run Average Cost Curves $/Q ATC5 ATC1 ATC2 ATC4 ATC3 0 Q

  20. Short-Run Average Cost Curves $/Q ATC5 ATC1 ATC2 ATC4 ATC3 0 Q

  21. Long-Run Average Total Cost Curve $/Q LRATC ATC1 ATC4 • ATC2 • ATC3 • • 0 Q

  22. Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS) $/Q Diseconomies of Scale Economies of Scale LRATC 0 Q QMES

  23. Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS) Neither Economies nor Diseconomies of Scale Constant Returns to Scale $/Q Economies of Scale Increasing Returns to Scale LRATC 0 QMES Q

  24. Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS) $/Q LRATC 0 QMES Q

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