Cost & Production Theory Firms seek to produce any given quantity of output (Q) at lowest cost....
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Transcript of Cost & Production Theory Firms seek to produce any given quantity of output (Q) at lowest cost....
Cost & Production Theory
Firms seek to produce any given quantity of output (Q) at lowest cost.
Firms are cost minimizers.
Costs C = rK + wL r is the price of capital, w is the wage Cost is the sum of each input quantity
multiplied by its price when input prices reflect all costs including opportunity costs
Economic Costs are Opportunity Costs Economic Cost includes both
implicit and explicit costs Explicit Costs – payment to others Implicit Costs – cost of owned
inputs, or other costs that do not generate explicit payments
Costs and Output Long-Run Total Cost or LTC
Combinations of Cost and Output Q (C1,Q1), (C2,Q2), (C3,Q3)
Long-run average cost LAC = (LTC/Q)
Long-run marginal cost LMC = ΔLTC/ΔQ
Short-run vs. Long-run Long-run: all inputs variable Short-run: one or more inputs fixed
Total Product: Q = f(K0,L) Average Product of Labor: APL = Q/L Marginal Product of Labor: MPL = ΔQ/ΔL
Law of diminishing marginal product As more labor is employed with a fixed
amount of capital, labor’s marginal product (MPL) eventually declines
Watch the video Microeconomics The Law of
Diminishing Returns: Econ Concepts in 60 Seconds http://youtu.be/M7rA4VfvdAw
Short-run Costs Total Cost = rK0 + wL = TC Total Fixed Cost = rK0 = TFC Total Variable Cost = wL = TVC TC = TFC + TVC Average Fixed Cost: AFC = TFC/Q Average Variable Cost: AVC = TVC/Q Average Total Cost: ATC = TC/Q
Short-run Marginal Cost SMC = ΔTC/ΔQ
ΔTFC/ΔQ = 0 SMC = ΔTVC/ΔQ = ΔTC/ΔQ
SMC = AVC at its minimum SMC = ATC at its minimum
Watch the videos Episode 23: Cost Curves
http://youtu.be/UI-LL8-dVAs
Cost Curves MC, ATC, AVC, and AFC: Econ Concepts in 60 Seconds http://youtu.be/S3iLMfm6CGY
Short-run Cost & Product AVC and MC are inversely related
to APL and MPL MPL > APL implies MC < AVC Max MPL corresponds to Min MC MPL = APL implies MC = AVC MPL < APL implies MC > AVC
Short-run and Long-run Cost Short-run and long-run costs are
equal ONLY at a long-run optimum The quantity where short-run fixed K0
minimizes long run cost ATC = LAC
Only at the minimum of LAC are all average and marginal costs equal LAC = LMC = ATC = SMC
Watch the video 9.2 - Long-Run Cost Structure
http://youtu.be/8I6BIuCGuaE
Economies of Scale Economies of scale: LAC is decreasing
Costs increase less than proportionately with output
Diseconomies of scale: LAC increasing Costs increase more than proportionately
with output Constant returns to scale: LAC = LMC
Costs increase exactly in proportion to output Minimum Efficient Scale or MES
The quantity at which economies of scale end and constant returns begin
Watch the video Economies and Diseconomies of
Scale.mp4 http://youtu.be/6TW-o1NqV0I
Economies of Scope A firm can produce two products
together more cheaply than producing each product separately, or C(X,Y) < C(X) + C(Y)