Transcript Chapter 9
Chapter 9
Businesses and the Cost of Production
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Economic Costs
LO1 • • • The payment that must be made to obtain and retain the services of a resource
Explicit costs
• Monetary outlay
Implicit costs
• Opportunity cost of using self-owned resources • Value of next-best use • Includes a
normal profit
9-2
LO1
Accounting Profit and Normal Profit
• • •
Accounting profit
= Total revenue – explicit costs
Economic profit
= Accounting profit – implicit costs Economic profit (to summarize) = Revenue –
economic cost
= Revenue – explicit costs – implicit costs 9-3
LO2
Short Run and Long Run
• •
Short run
• Some variable inputs • Fixed plant
Long run
• All inputs are variable • Firms can adjust plant size as well as enter and exit industry 9-4
LO2
Short Run Production Relationships
• •
Total product
(TP)
Marginal product
(MP) Marginal product
=
change in total product change in labor input •
Average product
(AP) Average product
=
total product units of labor 9-5
LO2
Law of Diminishing Returns
• •
Law of diminishing returns
• Resources are of equal quality • Technology is fixed • Variable resources are added to fixed resources • At some point, marginal product will fall Rationale 9-6
LO3
Short Run Production Costs
• • •
Fixed costs
(TFC) • Costs that do not vary with output
Variable costs
(TVC) • Costs that do vary with output
Total cost
(TC) • Sum of TFC and TVC • TC = TFC + TVC 9-7
LO3
Per-Unit, or Average, Costs
• • • •
Average fixed cost Average variable cost Average total cost Marginal cost
AFC = TFC/Q AVC = TVC/Q ATC = TC/Q MC = ΔTC/ΔQ 9-8
LO4
Long Run Production Costs
• • • The firm can change all input amounts, including plant size All costs are variable in the long run Long run ATC • Different short run ATCs 9-9
LO4
Economies of Scale
• •
Economies of scale
• Labor specialization • Managerial specialization • Efficient capital • Other factors
Constant returns to scale
9-10
LO4
Diseconomies of Scale
•
Diseconomies of scale
• Control and coordination problems • Communication problems • Worker alienation • Shirking 9-11
LO4
MES and Industry Structure
• •
Minimum efficient scale
(MES) • Lowest level of output at which long run average costs are minimized • Can determine the structure of the industry
Natural monopoly
• Long run costs are minimized when one firm produces the product 9-12