Chapter 4 Costs of Production TShirts Produced per

Chapter 4 – Costs of Production

T-Shirts Produced per Day 300 250 TP 200 150 100 50 0 1 2 3 4 5 6 T-Shirts Produced per Day Number of Workers Employed per Day Diminishing returns set in 120 100 80 60 AP 40 20 0 -20 1 2 3 4 5 6 MP Number of Workers Employed per Day

T-Shirts Produced per Day 300 250 TP 200 150 100 50 0 1 2 3 4 5 6 T-Shirts Produced per Day Number of Workers Employed per Day Diminishing returns set in 120 100 80 60 AP 40 20 0 -20 1 2 3 4 5 6 MP Number of Workers Employed per Day

Labour (L) Total Marginal Fixed Variable Product Costs (MP) (q) (FC) (VC) 0 0 1 80 2 200 3 250 4 270 5 280 80 120 50 20 10 Average Marginal Average Cost Fixed Costs Variable (AC) (MC) (AFV) Costs (ΔTC/Δq) (FC/q) (AVC) (AFC + AVC) (VC/q) Total Cost (TC) (FC + VC) $825 $0 $825 140 965 825 300 1125 825 425 1250 825 535 1360 825 640 1465 140 $1. 75 160 1. 33 125 2. 50 110 5. 50 105 10. 50 $10. 31 $1. 75 $12. 06 4. 13 1. 50 5. 63 3. 30 1. 70 5. 00 3. 06 1. 98 5. 04 2. 95 2. 29 5. 24

1. Increasing Returns to Scale (Economies of Scale)

2. Constant Returns to Scale

2. Constant Returns to Scale 3. Decreasing Returns to Scale

Long-Run Average Costs AC 4 $ per Magazine AC 1 AC 2 Range A AC 3 Range B Quantity of Magazines per Week Range C Long-Run AC

There are some industries that ONE RANGE will DOMINATE the LR average cost Possible Long-Run Average Costs Extended Range of Decrease Returns to Scale Extended Range of Constant Returns to Scale Extended Range of Increasing Returns to Scale Quantity of Output Manufacturing Industry Long-Run AC Quantity of Output Craft Industries $ per Unit Long-Run AC Quantity of Output Primary Industries