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Costs and supply. Perfect competition PowerPoint Presentation
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Costs and supply. Perfect competition

Costs and supply. Perfect competition

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Costs and supply. Perfect competition

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  1. Costs and supply. Perfect competition Lectures/DeianDoykov/International University/Foundation Year/Semester 1-2005

  2. Perfect competition “The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it” Adam Smith. The Wealth of Nations 2 November 05

  3. Introduction to Economics • Costs and supply. Perfect competition • Input and output. • Costs and the choice of technique. • Long run total, marginal and average costs. • Returns to scale. • Average cost and marginal cost. 3 October 05

  4. Introduction to Economics • Costs and supply. Perfect competition • The firm’s short and long run output decisions. • Short run costs and diminishing marginal returns. • Short run and long run costs. • Perfect competition and perfectly competitive firm. 4 October 05

  5. Costs and supply Input and output 5 November 05

  6. Input and output Factors of production Labor and capital used to produce goods and services Production function The set of all technically efficient Techniques Technological progressAn increase in output without increasing inputs. 6 November 05

  7. Costs and supply Economic cost versusAccounting cost Economic cost(EC) Explicit costs plus implicit costs Accounting cost(AC) Measures the explicit costs of operating a business Explicit costs (Ex. C) The firm's actual cash payments for its inputs Implicit costs(IC) The opportunity cost of nonpurchased inputs 7 November 05

  8. Costs and supply Short-run costs Total cost 8 November 05

  9. Costs and supply Short run A period of time over which one or more factors of production is fixed; in most cases, a period of time over which a firm cannot modify an existing facility or build a new one Short-run average total cost (SATC)Short-run total cost divided by the quantity of output, equal to AFC plus AVC. Short-run average variable cost (SAVC)Variable cost divided by the quantity produced 9 November 05

  10. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 10 November 05

  11. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 TFC 11 November 05

  12. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TVC (£) 0 10 16 21 28 40 60 91 TFC (£) 12 12 12 12 12 12 12 12 TFC 12 November 05

  13. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TVC (£) 0 10 16 21 28 40 60 91 TFC (£) 12 12 12 12 12 12 12 12 TVC TFC 13 November 05

  14. Total costs for firm X Diminishing marginal returns set in here TVC TFC 14 November 05

  15. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TVC (£) 0 10 16 21 28 40 60 91 TFC (£) 12 12 12 12 12 12 12 12 TVC TFC 15 November 05

  16. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103 TFC (£) 12 12 12 12 12 12 12 12 TVC TFC 16 November 05

  17. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103 TFC (£) 12 12 12 12 12 12 12 12 TC TVC TFC 17 November 05

  18. Total costs for firm X Diminishing marginal returns set in here TC TVC TFC 18 November 05

  19. Short-run costs Marginal cost = TC / Q 19 November 05

  20. Deriving marginal costs Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7103 10 6 5 7 12 20 31 Costs (£) Q 20 November 05

  21. Deriving marginal costs Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7103 10 6 5 7 12 20 31 Costs (£) TC Q 21 November 05

  22. Deriving marginal costs Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7103 10 6 5 7 12 20 31 Costs (£) TC DTC = 12 DQ = 1 Q 22 November 05

  23. Deriving marginal costs Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7103 10 6 5 7 12 20 31 Diminishing returns set in here Costs (£) TC MC Q 23 November 05

  24. Deriving marginal costs Diminishing marginal returns set in here Costs (£) MC Q 24 November 05

  25. Short-run costs Average cost =TC / Q 25 November 05

  26. Costs (£) Q 26 November 05

  27. Q TVC AVC 0 0 - 1 1010 2 16 8 3 21 7 428 7 5 40 8 6 60 10 7 91 13 Costs (£) AFC Q 27 November 05

  28. Q TVC AVC 0 0 - 1 1010 2 16 8 3 21 7 428 7 5 40 8 6 60 10 7 91 13 Costs (£) AVC AFC Q 28 November 05

  29. Q TC AC 0 12 1 2222 2 2814 3 33 11 4 4010 5 52 10.4 6 7212 710314.7 Costs (£) AVC AFC Q 29 November 05

  30. Q TC AC 0 12 1 2222 2 2814 3 33 11 4 4010 5 52 10.4 6 7212 710314.7 Costs (£) AC AVC AFC Q 30 November 05

  31. QTC MC 012 1 22 228 3 33 440 5 52 6 72 7103 10 6 5 7 12 20 31 Costs (£) Q 31 November 05

  32. QTC MC 012 1 22 228 3 33 440 5 52 6 72 7103 10 6 5 7 12 20 31 Costs (£) MC Q 32 November 05

  33. Costs (£) QTC MC AC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7103 - 22 14 11 10 10.4 12 14.7 MC 10 6 5 7 12 20 31 Q 33 November 05

  34. Costs (£) QTC MC AC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7103 - 22 14 11 10 10.4 12 14.7 MC 10 6 5 7 12 20 31 AC Q 34 November 05

  35. Average and marginal costs MC AC AVC z y x AFC Costs (£) Output (Q) 35 November 05

  36. Long-run costs Long-run costs =TC / Q 36 November 05

  37. Long-run costs • Long run A period of time long enough that a firm can change all the factors of production, meaning that a firm can modify its existing production facility or build a new one • Long-run average cost (LAC)Long-run total cost divided by the quantity of output produced • Long-run total costThe total cost of production in the long run when a firm is perfectly flexible in its choice of all inputs and can choose a production facility of any size 37 November 05

  38. Returns to scale • Economies of scaleA situation in which an increase in the quantity produced decreases the long-run average cost of production • Diseconomies of scaleA situation in which an increase in the quantity produced increases the long-run average cost of production • Constant returns to scaleThe total cost of production in the long run when a firm is perfectly flexible in its choice of all inputs and can choose a production facility of any size • Minimum efficient scale The output at which the long-run average cost curve becomes horizontal 38 November 05

  39. Alternative long-run average cost curves LRAC Economies of Scale Costs O Output 39 November 05

  40. Alternative long-run average cost curves LRAC Diseconomies of Scale Costs O Output 40 November 05

  41. Alternative long-run average cost curves LRAC Constant costs Costs O Output 41 November 05

  42. A typical long-run average cost curve LRAC Costs O Output 42 November 05

  43. A typical long-run average cost curve LRAC Economies of scale Constant costs Diseconomies of scale Costs O Output 43 November 05

  44. Long-run average and marginal costs LRMC Economies of Scale Costs LRAC O Output 44 November 05

  45. Long-run average and marginal costs LRMC LRAC Diseconomies of Scale Costs O Output 45 November 05

  46. Long-run average and marginal costs Constant costs Costs LRAC = LRMC O Output 46 November 05

  47. Long-run average and marginal costs LRMC Initial economies of scale, then diseconomies of scale LRAC Costs O Output 47 November 05

  48. Long-run costs Relationship between short-run and long-run AC curves 48 November 05

  49. Deriving long-run average cost curves: factories of fixed size SRAC5 SRAC1 SRAC2 SRAC4 SRAC3 5 factories 4 factories 1 factory Costs 2 factories 3 factories O Output 49 November 05

  50. Deriving long-run average cost curves: factories of fixed size SRAC5 SRAC1 SRAC2 SRAC4 SRAC3 LRAC Costs O Output 50 November 05