Economic Costs ShortRun and LongRun ShortRun Production Relationships

Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically 22 CHAPTER Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 1 Next Slide The Costs of Production Copyright Mc. Graw-Hill/Irwin, 2002

Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 2 Next Slide ECONOMIC COSTS Economic Costs or Opportunity Costs Forgoing the opportunity to produce alternative goods and services Explicit Costs Implicit Costs Copyright Mc. Graw-Hill/Irwin, 2002

ECONOMIC COSTS Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Normal Profits • Treated as a cost • Required to attract & retain resources Economic or Pure Profits Key Terms Previous Slide End Show 22 - 3 Next Slide Economic profit Total revenue Copyright Mc. Graw-Hill/Irwin, 2002 Opportunity cost of all inputs

ECONOMIC COSTS Profits to an Economist Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 4 Next Slide Economic (opportunity) Costs Short-Run Production Costs Economic Profit Implicit costs (including a normal profit) Explicit Costs Copyright Mc. Graw-Hill/Irwin, 2002 Profits to an Accountant T O T A L R E V E N U E Accounting Profit Accounting costs (explicit costs only)

SHORT RUN AND LONG RUN Accounting: Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 5 Next Slide Short and long run is based upon annual chronology Economics: Short run has fixed plant capacity size Long run has variable plant capacity size Copyright Mc. Graw-Hill/Irwin, 2002

SHORT-RUN PRODUCTION RELATIONSHIPS Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Total Product (TP) Marginal Product (MP) Change in Total Product Marginal Product = Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 6 Next Slide Change in Labor Input Average Product (AP) Average Product = Copyright Mc. Graw-Hill/Irwin, 2002 Total Product Units of Labor

Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 7 Next Slide Total Product, TP Short-Run and Long-Run Average Product, AP, and marginal product, MP Economic Costs SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002 Increasing Marginal Returns Average Product Marginal Product

Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 8 Next Slide Total Product, TP Short-Run and Long-Run Average Product, AP, and marginal product, MP Economic Costs SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002 Diminishing Marginal Returns Average Product Marginal Product

Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 9 Next Slide Total Product, TP Short-Run and Long-Run Average Product, AP, and marginal product, MP Economic Costs SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product Quantity of Labor Copyright Mc. Graw-Hill/Irwin, 2002 Negative Marginal Returns Average Product Marginal Product

SHORT-RUN PRODUCTION COSTS Fixed Costs Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Total Fixed Costs Average Fixed Costs = Total Fixed Costs Quantity Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 10 Next Slide Variable Costs Total Variable Costs Average Variable Costs = Copyright Mc. Graw-Hill/Irwin, 2002 Total Variable Costs Quantity

SHORT-RUN PRODUCTION COSTS Total Cost Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Total Fixed and Variable Costs Average Total Cost = Total Costs Quantity Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 11 Next Slide Marginal Cost Total Variable Costs Marginal Cost = Copyright Mc. Graw-Hill/Irwin, 2002 Change in Total Costs Change in Quantity

SHORT-RUN PRODUCTION COSTS Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 12 Next Slide Summary of Definitions Total Fixed Costs = Total Variable Costs = Total Costs = Average Fixed Costs = Average Variable Costs = Average Total Costs = Marginal Cost = Copyright Mc. Graw-Hill/Irwin, 2002 TFC TVC TC AFC AVC ATC MC

SHORT-RUN COSTS GRAPHICALLY Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Costs (dollars) Short-Run Production Costs Combining TVC With TFC to get Total Cost Key Terms Previous Slide End Show 22 - 13 Next Slide Total Cost TC TVC Fixed Cost Variable Cost TFC Quantity Copyright Mc. Graw-Hill/Irwin, 2002

SHORT-RUN COSTS GRAPHICALLY MC Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Costs (dollars) Short-Run Production Costs Plotting Average and Marginal Costs ATC AVC Key Terms Previous Slide End Show 22 - 14 AFC Next Slide Quantity Copyright Mc. Graw-Hill/Irwin, 2002

Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Average product and marginal product PRODUCTIVITY AND COST CURVES Long-Run Production Costs Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 15 Next Slide Quantity of labor Costs (dollars) Economies and Diseconomies of Scale AP MP Copyright Mc. Graw-Hill/Irwin, 2002 MC Quantity of output AVC

LONG-RUN PRODUCTION COSTS Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 16 Next Slide For every plant capacity size. . . There is a short-run ATC curve All such plant capacities can be plotted. . . Copyright Mc. Graw-Hill/Irwin, 2002

LONG-RUN PRODUCTION COSTS Economic Costs Short-Run and Long-Run Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Unit Costs Short-Run Production Relationships Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 17 Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

LONG-RUN PRODUCTION COSTS Economic Costs Short-Run and Long-Run Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Unit Costs Short-Run Production Relationships Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 18 Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

LONG-RUN PRODUCTION COSTS Economic Costs Short-Run and Long-Run Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Unit Costs Short-Run Production Relationships The Long-run ATC just “envelopes” all of the short-run ATC curves Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 19 Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

LONG-RUN PRODUCTION COSTS Economic Costs Short-Run and Long-Run Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Unit Costs Short-Run Production Relationships Minimum Efficient Scale and Industry Structure Long-run ATC Key Terms Previous Slide End Show 22 - 20 Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

ECONOMIES AND DISECONOMIES OF SCALE Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 21 Next Slide • Labor Specialization • Managerial Specialization • Efficient Capital • Other Factors Diseconomies of Scale Constant Returns to Scale Copyright Mc. Graw-Hill/Irwin, 2002 graphically presented

ECONOMIES AND DISECONOMIES OF SCALE Economic Costs Short-Run and Long-Run Short-Run Production Relationships Economies of scale Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 22 Unit Costs Short-Run Production Costs Long-run ATC Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

ECONOMIES AND DISECONOMIES OF SCALE Economic Costs Short-Run and Long-Run Short-Run Production Relationships Economies of scale Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 23 Constant returns to scale Unit Costs Short-Run Production Costs Long-run ATC Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

ECONOMIES AND DISECONOMIES OF SCALE Economic Costs Short-Run and Long-Run Short-Run Production Relationships Economies of scale Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 24 Constant returns to scale Diseconomies of scale Unit Costs Short-Run Production Costs Long-run ATC Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

ECONOMIES AND DISECONOMIES OF SCALE Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 25 Unit Costs Short-Run Production Costs Where extensive economies of scale exist Long-run ATC Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

ECONOMIES AND DISECONOMIES OF SCALE Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 26 Unit Costs Short-Run Production Costs Where economies of scale are quickly exhausted Long-run ATC Next Slide Output Copyright Mc. Graw-Hill/Irwin, 2002

MINIMUM EFFICIENT SCALE AND INDUSTRY STRUCTURE Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale - MES Natural Monopoly Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 27 Next Slide Chapter Conclusions Copyright Mc. Graw-Hill/Irwin, 2002

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 Copyright Mc. Graw-Hill/Irwin 2002 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 BACK END

NEXT: Economic Costs Short-Run and Long-Run Short-Run Production Relationships Pure Competition Short-Run Production Costs Short-Run Costs Graphically Productivity and Cost Curves Long-Run Production Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previous Slide End Show 22 - 29 Next Slide Chapter 23 Copyright Mc. Graw-Hill/Irwin, 2002