The costs of production l.jpg
Sponsored Links
This presentation is the property of its rightful owner.
1 / 29

The Costs of Production PowerPoint PPT Presentation


  • 206 Views
  • Updated On :
  • Presentation posted in: General

9. C H A P T E R. The Costs of Production. ECONOMIC COSTS. Economic Costs or Opportunity Costs Forgoing the opportunity to produce alternative goods and services. Explicit Costs Implicit Costs. Economic Profit. Total Revenue. Economic Cost. ECONOMIC COSTS. Normal Profits.

Download Presentation

The Costs of Production

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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


9

C H A P T E R

The Costs of Production


ECONOMIC COSTS

Economic Costs or Opportunity Costs

Forgoing the opportunity to produce alternative goods and services

Explicit Costs

Implicit Costs


Economic

Profit

Total

Revenue

Economic Cost

ECONOMIC COSTS

Normal Profits

  • Treated as a cost

  • Required to attract & retain resources

Economic or Pure Profits


Economic

Profit

Accounting

Profit

Implicit costs

(including a

normal profit)

Accounting

costs (explicit

costs only)

Explicit

Costs

ECONOMIC COSTS

Profits to an

Economist

Profits to an

Accountant

T

O

T

A

L

R

E

V

E

N

U

E

Economic (opportunity) Costs


SHORT RUN AND LONG RUN

Accounting:

Short and long runis based upon annual chronology.

Economics:

Short runhas fixed plant capacity size.

Long runhas variable plant capacity size.


Change in Total Product

Marginal Product =

Change in Labor Input

Total Product

Average Product =

Units of Labor

SHORT-RUN PRODUCTION

RELATIONSHIPS

Total Product (TP)

Marginal Product (MP)

Average Product (AP)


SHORT-RUN PRODUCTION

RELATIONSHIPS

Law of Diminishing Returns

Total Product

Total Product, TP

Increasing

Marginal

Returns

Quantity of Labor

Average Product, AP, and

Marginal Product, MP

Average

Product

Marginal

Product

Quantity of Labor


SHORT-RUN PRODUCTION

RELATIONSHIPS

Law of Diminishing Returns

Total Product

Total Product, TP

Diminishing

Marginal

Returns

Quantity of Labor

Average Product, AP, and

Marginal Product, MP

Average

Product

Marginal

Product

Quantity of Labor


SHORT-RUN PRODUCTION

RELATIONSHIPS

Law of Diminishing Returns

Total Product

Total Product, TP

Negative

Marginal

Returns

Quantity of Labor

Average Product, AP, and

Marginal Product, MP

Average

Product

Marginal

Product

Quantity of Labor


Total Fixed Costs

Average Fixed Costs =

Quantity

Total Variable Costs

Average Variable Costs =

Quantity

SHORT-RUN PRODUCTION COSTS

Fixed Costs

Total Fixed Costs

Variable Costs

Total Variable Costs


Total Costs

Average Total Cost =

Quantity

Change in Total Costs

Marginal Cost =

Change in Quantity

SHORT-RUN PRODUCTION COSTS

Total Cost

Total Fixed and Variable Costs

Marginal Cost

Total Variable Costs


SHORT-RUN PRODUCTION COSTS

Summary of Definitions

Total Fixed Costs=TFC

Total Variable Costs=TVC

Total Costs=TC

Average Fixed Costs=AFC

Average Variable Costs=AVC

Average Total Costs=ATC

Marginal Cost= MC


SHORT-RUN COSTS GRAPHICALLY

TC

Combining TVC

With TFC to get

Total Cost

TVC

Fixed Cost

Costs (dollars)

Variable Cost

Total

Cost

TFC

Quantity


SHORT-RUN COSTS GRAPHICALLY

MC

Plotting Average and

Marginal Costs

ATC

AVC

Costs (dollars)

AFC

Quantity


Average Product and

Marginal Product

Quantity of labor

Costs (dollars)

Quantity of output

PRODUCTIVITY AND COST CURVES

AP

MP

MC

AVC


LONG-RUN PRODUCTION COSTS

For every plant capacity size...

there is a short-run ATC curve.

All such plant capacities

can be plotted.


LONG-RUN PRODUCTION COSTS

Unit Costs

Output


LONG-RUN PRODUCTION COSTS

Unit Costs

Output


LONG-RUN PRODUCTION COSTS

The long-run ATC just “envelopes”

all of the short-run ATC curves.

Unit Costs

Output


LONG-RUN PRODUCTION COSTS

Unit Costs

long-run ATC

Output


ECONOMIES AND

DISECONOMIES OF SCALE

  • Labor Specialization

  • Managerial Specialization

  • Efficient Capital

  • Other Factors

Diseconomies of Scale

Constant Returns to Scale

graphically presented...


ECONOMIES AND

DISECONOMIES OF SCALE

Economies

of scale

Unit Costs

long-run ATC

Output


ECONOMIES AND

DISECONOMIES OF SCALE

Constant returns

to scale

Economies

of scale

Unit Costs

long-run ATC

Output


ECONOMIES AND

DISECONOMIES OF SCALE

Constant returns

to scale

Diseconomies

of scale

Economies

of scale

Unit Costs

long-run ATC

Output


ECONOMIES AND

DISECONOMIES OF SCALE

Where extensive

economies of

scale exist

Unit Costs

long-run ATC

Output


ECONOMIES AND

DISECONOMIES OF SCALE

Where economies

of scale are

quickly exhausted

Unit Costs

long-run ATC

Output


MINIMUM EFFICIENT SCALEAND INDUSTRY STRUCTURE

Minimum Efficient Scale - MES

Natural Monopoly

  • Applications & Illustrations

    • Rising Cost of Insurance and Security

    • Successful Start-Up Firms

    • The Verson Stamping Machine

    • The Daily Newspaper

    • Aircraft and Concrete Plants


economic (opportunity) cost

explicit costs

implicit costs

normal profit

economic profit

short run

long run

total product (TP)

marginal product (MP)

average product (AP)

law of diminishing returns

fixed costs

variable costs

total cost

average fixed cost (AFC)

average variable cost (AVC)

average total cost (ATC)

marginal cost (MC)

economies of scale

diseconomies of scale

constant returns to scale

minimum efficient scale

natural monopoly

KEY TERMS

Copyright McGraw-Hill/Irwin, 2005

BACK

END


NEXT:

Pure Competition

Chapter 10


  • Login