Lecture Economics (19/e) - Chapter 7: Businesses and the costs of production

After reading chapter 7, you should be able to: Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs; relate the law of diminishing returns to a firm’s short-run production costs; describe the distinctions between fixed and variable costs and among total, average, and marginal costs; use economies of scale to link a firm’s size and its average costs in the long run.

Production 07

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obtain and retain the services of a

resource

= Revenue – Explicit Costs

= Accounting Profit – Implicit Costs

=Total Revenue – Economic Costs

=Total Revenue – Explicit Costs –

Implicit Costs

Explicit costs

Accounting costs (explicit costs only)

Implicit costs (including a normal profit)

Economic

profit

Short Run and Long Run

Change in Labor Input

=

Units of Labor

=

TP

AP

Increasing Marginal Returns

Diminishing Marginal Returns

Negative Marginal Returns

0 10 20 30

20 10

Short­Run Production Costs

100 200 300 400 500 600 700 800 900 1000

$1100

TFC

TC TVC

Total Cost Variable Cost

Fixed Cost

Per­Unit, or Average, Costs

50 100 150

$200

AFC

ATC AVC

AVC AFC

50 100 150

$200

MC

ATC AVC

AVC AFC

MP

AP

MC

AVC

Quantity of Labor

Production Curves

Cost Curves

amounts, including plant size

Long-Run ATC

ATC-1

ATC-2

ATC-5

Output

Economies and Diseconomies of Scale

Economies and Diseconomies of Scale

run average costs are minimized

industry

Output

Long-Run ATC

Economies

Of Scale

Constant Returns

To Scale

Diseconomies

Of Scale

and thus are irrecoverable

where MB<MC