Post on 02-Apr-2018
7/27/2019 Micro Economics Slide5
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ECONOMIC COSTSEconomic Costs or
Opportunity CostsForgoing the opportunityto produce alternative
goods and services
Explicit CostsDirect payment
Implicit CostsOpportunity cost of the owner of afirm.
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Explicit cost:
An explicit cost is a direct payment made to others in thecourse of running a business, such as wage, rent and materials
Implicit cost:
In economics, an implicit cost, also called an imputed cost,
implied cost, ornotional cost, is the opportunity cost equal towhat a firm must give up in order to use factors which it neither
purchases nor hires.
These are intangible costs that are not easily accounted for.
For example, the time and effort that an owner puts into themaintenance of the company rather than working on expansion.
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Economic or Pure Profits
Economic
Profit
Total
RevenueEconomic Cost
ECONOMIC COSTS
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Economic
Profit
Implicit costs
(including a
normal profit)
Explicit
Costs
Accounting
costs (explicit
costs only)
Accounting
Profit
Economic(opportunity)Costs
T
O
TA
L
R
EV
E
N
U
E
Profits to anEconomist Profits to anAccountant
ECONOMIC COSTS
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SHORT RUN AND LONG RUN
Accounting:Short and long runisbased upon annual
chronology.Economics:Short runhas fixed plantcapacity size.Long runhas variable
plant capacity size.
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Average Product (AP)
Total Product (TP)Marginal Product (MP)
SHORT-RUN PRODUCTIONRELATIONSHIPS
Marginal Product =Change in TotalProduct
Change in LaborInput
Average Product =
TotalProductUnits of Labor
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Law of Diminishing Return
SHORT-RUN PRODUCTIONRELATIONSHIPS
TotalProduct,TP
Quantity of Labor
AverageProduct,A
P,and
MarginalProduc
t,MP
Quantity of Labor
Total Product
Marginal
Product
Average
Product
Increasing
Marginal
Returns
http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.html7/27/2019 Micro Economics Slide5
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Law of Diminishing Return
SHORT-RUN PRODUCTIONRELATIONSHIPS
TotalProduct,TP
Quantity of Labor
AverageProduct,AP,and
MarginalProduc
t,MP
Quantity of Labor
Total Product
Marginal
Product
Average
Product
Diminishing
Marginal
Returns
http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.html7/27/2019 Micro Economics Slide5
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Law of Diminishing Return
SHORT-RUN PRODUCTIONRELATIONSHIPS
TotalProduct,TP
Quantity of Labor
AverageProduct,AP,and
MarginalProduc
t,MP
Quantity of Labor
Total Product
Marginal
Product
Average
Product
Negative
Marginal
Returns
http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.htmlhttp://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.html7/27/2019 Micro Economics Slide5
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Fixed CostsTotal Fixed Costs
Average Fixed Costs =Total Fixed Costs
Quantity
Variable Costs
Total Variable Costs
Average Variable Costs =Total Variable Costs
Quantity
SHORT-RUN PRODUCTION COSTS
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Total CostTotal Fixed and Variable Costs
Average Total Cost =Total Costs
Quantity
Marginal Cost
Marginal Cost = Change in Total CostsChange in Quantity
SHORT-RUN PRODUCTION COSTS
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Total Fixed Costs= TFCTotal Variable Costs= TVC
Average Variable Costs= AVC
Total Costs= TC
Average Total Costs= ATC
Average Fixed Costs= AFC
Summary of DefinitionsSHORT-RUN PRODUCTION COSTS
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SHORT-RUN COSTS GRAPHICALLY
Quant i ty
Cos
ts(
do
llars
)
TC
TVC
TFC
Combining TVCWith TFC to getTotal Cost
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SHORT-RUN COSTS GRAPHICALLY
Quant i ty
Cos
ts(
do
llars
)
AFC
AVC
ATC
MCPlotting Average and
Marginal Costs
http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/interactive_graphs.html7/27/2019 Micro Economics Slide5
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PRODUCTIVITY AND COST CURVES
Cos
ts(
do
llars
)
Average
Pro
du
ctan
d
Marg
ina
lPro
duc
t
Quant ity o f labor
Quant ity of outpu t
MP
AP
MCAVC
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LONG-RUN PRODUCTION COSTS
All such plant capacitiescan be plotted.
For every plant capacitysize...there is a short-run ATC
curve.
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LONG-RUN PRODUCTION COSTS
UnitCo
sts
Output
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LONG-RUN PRODUCTION COSTS
UnitCo
sts
Output
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LONG-RUN PRODUCTION COSTS
The long-run ATCjust envelopesall of the short-run ATC curves.
UnitCo
sts
Output
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LONG-RUN PRODUCTION COSTS
UnitCo
sts
Output
long-run ATC
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