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Understanding Short-Run and Long-Run Cost Dynamics in Production

This chapter explores the variation of short-run costs with output through graphical analyses, including cost curves and effects of taxes on production. It features applications such as printing firms and rice milling, illustrating the relationships between variable costs, average costs, and marginal costs. Detailed tables and figures, depicting isocost and isoquant lines, provide insights into cost minimization strategies. The chapter also examines learning by doing, economies of scale, and the implications for efficiency in production processes.

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Understanding Short-Run and Long-Run Cost Dynamics in Production

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  1. Chapter 7 Costs

  2. Table 7.01 Variation of Short-Run Cost with Output

  3. (a) Figure 7.01 Short-Run Cost Curves Cost, $ 400 C VC 27 A 1 216 20 1 B 120 48 F 0 2 4 6 8 10 Quantity, q , Units per day (b) Cost per unit, $ 60 MC AC a 28 27 AVC b 20 8 AFC 0 2 4 6 8 10 Quantity, q , Units per day

  4. Figure 7.02 Variable Cost and Total Product of Labor Quantity, q , Total product of labor, Units per day Variable cost 13 10 6 5 1 0 5 20 24 46 77 25 100 120 230 385 L , Hours of labor per day VC = wL , Variable cost, $

  5. Application Short-Run Cost Curves for a Printing Firm Cost, kroner 50 MC 40 30 AC AVC 20 10 AFC 0 100 200 300 q , Units per year

  6. Table 7.02 Effect of a Specific Tax of $10 per Unit on Short-Run Costs

  7. Figure 7.03 Effects of a Specific Tax on Cost Curves Costs per unit, $ a b MC = MC + 10 80 b MC $10 a b AC = AC + 10 37 b $10 AC 27 0 5 8 10 15 q , Units per day

  8. Solved Problem 7.1 Costs per unit, $ C M / a = AC AC + b q / q b AC q q q , Units per day b a

  9. Table 7.03 Bundles of Labor and Capital that Cost the Firm $100

  10. Figure 7.04 A Family of Isocost Lines K , Units of capital per year $150 = 15 — — — $ 10 $100 e = 10 — — — $ 10 d c $50 = 5 — — — $10 b $ 50 isocost $100 isocost $150 isocost a $50 $100 $150 = = = — — — 10 — — — 20 — — — 30 $ 5 $ 5 $ 5 L , Units of labor per year

  11. Figure 7.05 Cost Minimization K , Units of q = 100 isoquant capital per year 3,000-kr isocost y 303 2,000-kr isocost 1,000-kr isocost x 100 z 28 0 24 50 116 L , Units of labor per year

  12. Application Rice Milling on Java K , Units of capital per year 80 Large bulk facility 70 60 50 Small bulk facility 40 Large rice mill 30 20 Small rice mill 10 Isoquant Hand pounding 2 1 C C isocost isocost 0 10 20 30 40 50 L , Workers per year

  13. Figure 7.06 Change in Factor Price K , Units of q = 100 isoquant capital per year Original isocost, 2,000 kr New isocost, 1,032 kr x 100 v 52 0 50 77 L , Workers per year

  14. Figure 7.07a Expansion Path and Long-Run cost Curve (a) Expansion Path K , Units of capital per year 4,000-kr isocost 3,000-kr isocost Expansion path 2,000-kr isocost z 200 y 150 x 100 200 isoquant 150 isoquant 100 isoquant 0 50 75 100 L , Workers per year

  15. Figure 7.07b Expansion Path and Long-Run cost Curve (b) Long-Run Cost Curve Long-run cost curve C , Cost, kroner 4,000 Z 3,000 Y 2,000 X 0 100 150 200 q , Units per year

  16. (a) Cost Curve Figure 7.08 Long-Run Cost Curves Cost, $ C q * q , Quantity per day (b) Marginal and Average Cost Curves Cost per MC unit, $ AC q * q , Quantity per day

  17. Table 7.04 Returns to Scale and Long-Run Costs

  18. Table 7.05 Shape of Average Cost Curves in Canadian Manufacturing

  19. Application Average Cost of Cement Firms Average cost, £ 7 6 5 4 AC 0 0.5 1.0 1.5 2.0 2.5 3.0 3.3 q , Cement, million tons per year

  20. Figure 7.09 Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves Average cost, $ LRAC 3 SRAC 2 SRAC 1 3 SRAC SRAC b 12 d 10 a c e 0 q q q , Output per day 1 2

  21. Application (a) Long-Run Cost Curves in Printing and Oil Pipelines (a) Norwegian Printing Firm Cost, kroner 40 1 SRAC 2 SRMC 1 SRMC 30 2 SRAC 20 = LRAC LRMC 10 0 200 600 1,200 q , Output per year

  22. Application (b) Long-Run Cost Curves in Printing and Oil Pipelines (b) Oil Pipelines Cost per barrel-mile 150 100 8 " SRAC 10 " SRAC 12 " SRAC 50 16 " SRAC 20 SRAC " 26 " SRAC SRAC " 40 10 LRAC 0 10 20 40 100 200 400 1000 2000 Thousand barrels per day

  23. Application Choosing an Ink-Jet or Laser Printer Cost, Cents per page 9 SRAC of laser printer 8 7 6 5 SRAC of ink-jet printer LRAC 0 16,500 33,000 q , Pages

  24. Figure 7.10 Long-Run and Short-Run Expansion Paths K , Capital per year 4,616 kr Long-run expansion path 4,000 kr 2,000 kr z 200 Short-run y x expansion path 100 200 isoquant 100 isoquant 0 50 100 159 L , Workers per year

  25. Figure 7.11a Learning by Doing (a) Learning by Doing on C-141 Aircraft Labor costs per plane, $ 500 400 300 200 100 Average labor cost 0 50 100 150 200 250 C-141 planes

  26. Figure 7.11b Learning by Doing (b) Economies of Scale and Learning by Doing Average cost Economies of scale A B Learning by doing C b 1 AC 2 AC c 3 AC q q q 1 2 3 q , Output per period

  27. Figure 7.12 Joint Production Mushrooms, Pints per day 8 6 1 PPF 2 PPF 0 4 6 Wild strawberries, Pints per day

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