CH 09

Economic Costs
Short-Run and Long-Run

Short-Run Production Relat
ionships
Short-Run Production Cost
s
Short-Run Costs Graphicall
y
Productivity and Cost Curv
es
9
CHAPTER
Long-Run Production Costs

Economies and Diseconom
ies of Scale
Minimum Efficient Scale a
nd Industry Structure
Key Terms
The Costs of Production

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9-1
Copyright McGraw-Hill/Irwin, 2005
Explicit cost
Economic Costs
ionships
s
Cost of T – shirts 40000 Raw material etc
y
es Clerck’s salary 18000 Hired labor
ies of Scale
Utilities 5000 (electricity,Gas,Teleph
nd Industry Structure -one, water)
Key Terms
Total explicit cost 63000
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End
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9-2
Implicit cost
Economic Costs
ionships
s Forgone interest 1000 Own capital
y
es
Forgone rent 5000 Own building
Economies and Diseconom Forgone Wages 22000 Own labor
ies of Scale
Forgone enterprenial 5000 Own enterprenial skills
Key Terms
Income
Total implicit cost 33000
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End
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9-3
Economic cost
Economic Costs
Explicit cost ( accounting cost) 63000
ionships
s
y Implicit cost 33000
es
ies of Scale Economic cost 96000
Key Terms
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9-4
ECONOMIC COSTS
Economic Costs
Economic Costs or
Opportunity Costs
ionships
s
Forgoing the
y
es
opportunity to produce
ies of Scale
alternative goods and

Key Terms
services
Explicit Costs
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Slide
End
Show
Slide
Implicit Costs
9-5
ECONOMIC COSTS
Economic Costs
Normal Profits
• Treated as a cost
ionships
• Required to attract &

s
y
retain resources
es
ies of Scale
Economic or Pure Profits

Key Terms
Economic Total
Previous Next Economic Cost
Slide Slide Profit Revenue
End
Show
9-6
ECONOMIC COSTS
Economic Costs
Short-Run and Long-Run Profits to an Profits to an
Economist Accountant
ionships
s
Short-Run Costs Graphicall T
Economic (opportunity) Costs
y
Productivity and Cost Curv Economic O
es
T
Long-Run Production Costs Profit
A Accounting
ies of Scale
Implicit costs L Profit
nd Industry Structure (including a
Key Terms
normal profit) R
E
V
Explicit Accounting
E
Previous Next costs (explicit
Slide Slide Costs N
U costs only)
End
Show E
9-7
Economic profit = total
Economic Costs revenue - economic cost
ionships
s Total revenue PQ= 120X1000 120000
y
es Explicit cost 63000
ies of Scale Implicit cost 33000
Key Terms Economic cost 96000
Economic profit 24000

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9-8
SHORT RUN AND LONG RUN
Economic Costs
Accounting:
ionships
Short and long run is based
upon annual chronology.
s
y
Economics:
es
Short run has fixed plant

ies of Scale
Key Terms
capacity size.
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Slide
Next
Slide
Long run has variable plant
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capacity size.
9-9
SHORT-RUN PRODUCTION
Economic Costs
RELATIONSHIPS
ionships
Total Product (TP)
Marginal Product (MP)
s
y
es
Change in Total Product
Economies and Diseconom Marginal Product =
ies of Scale Change in Labor Input
Key Terms
Average Product (AP)

Previous Next Total Product
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Average Product =
End Units of Labor
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9 - 10
Marginal & average product &
UnitLaw
of input of diminishing
Total product Marginal Returns
Average
Economic Costs
product product
ionships 0 0 --------- -------------
s
1 10 10 10
y
es 2 25 15 12.5
ies of Scale
3 45 20 15
4 60 15 15
Key Terms
5 70 10 14
Previous Next 6 75 5 12.5

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End 7 75 0 10.71
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9 - 11
8 McGraw-Hill/Irwin, 2005
Copyright 70 -5 8.75
Economic Costs
RELATIONSHIPS
Law of Diminishing Returns
ionships
Total Product, TP
s
Short-Run Costs Graphicall Total Product
y
es
Increasing
Marginal
ies of Scale
Average Product, AP, and
Quantity of Labor
Returns
Marginal Product, MP
Key Terms
Previous Next Average

Slide Slide Product
End Marginal
Show
9 - 12 Quantity of Labor Product
Economic Costs
RELATIONSHIPS
ionships
Total Product, TP
s
y
es
Diminishing
ies of Scale
Marginal
Returns
Quantity of Labor
Key Terms

Slide Slide Product
End Marginal
Show
Economic Costs
RELATIONSHIPS
ionships
Total Product, TP
s
y
es
Negative
Marginal
ies of Scale
Quantity of Labor
Returns
Key Terms

Slide Slide Product
End Marginal
Show
SHORT-RUN PRODUCTION COSTS
Economic Costs
Fixed Costs
Total Fixed Costs
ionships
Total Fixed Costs
s
y
Average Fixed Costs = Quantity
es
Variable Costs
ies of Scale
Key Terms
Total Variable Costs

Previous
Slide
Next
Slide
Average Variable Costs = Quantity
End
Show
9 - 15
Economic Costs
Total Cost
Total Fixed and Variable Costs
ionships
Total Costs
s
y
Average Total Cost = Quantity
es
Marginal Cost
ies of Scale
Key Terms

Change in Total Costs
Marginal Cost =
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Slide Slide
End
Change in Quantity
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9 - 16
Summary of Definitions
Total Fixed Costs = TFC
Economic Costs
ionships
s
Total Variable Costs = TVC
y
es
Total Costs = TC
ies of Scale
Average Fixed Costs = AFC
Average Variable Costs = AVC
Key Terms
Previous
Slide
Next
Slide
Average Total Costs = ATC
End
Show Marginal Cost = MC
9 - 17
SHORT-RUN COSTS GRAPHICALLY
TC
Economic Costs
Short-Run and Long-Run Combining TVC
With TFC to get TVC
ionships
Total Cost Fixed Cost

s
Costs (dollars)
y
es
ies of Scale
Key Terms
Total Variable Cost
Cost
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TFC
Slide Slide
End Quantity
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9 - 18
SHORT-RUN COSTS GRAPHICALLY
Economic Costs MC
Plotting Average and

ionships
Marginal Costs
s
ATC
Costs (dollars)
y
es
AVC
ies of Scale
Key Terms
Previous Next
AFC
Slide Slide
End Quantity
Show
9 - 19
PRODUCTIVITY AND COST CURVES
Average Product and

Marginal Product
Economic Costs
ionships
s
y
AP
es MP
Economies and Diseconom Quantity of labor
MC
ies of Scale
Costs (dollars)
Key Terms AVC
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End
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9 - 20 Quantity of output
LONG-RUN PRODUCTION COSTS
Economic Costs
For every plant capacity
size...
ionships
s
y
there is a short-run ATC
curve.
es
ies of Scale
All such plant capacities

Key Terms
Previous Next
can be plotted.
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End
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9 - 21
Economic Costs
ionships
s
Unit Costs
y
es
ies of Scale
Key Terms
Previous Next
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End
Output
Show
9 - 22
Economic Costs
ionships
s
Unit Costs
y
es
ies of Scale
Key Terms
Previous Next
Slide Slide
End
Output
Show
9 - 23
Economic Costs
ionships
The long-run ATC just “envelopes”
s all of the short-run ATC curves.
Unit Costs
y
es
ies of Scale
Key Terms
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End
Output
Show
9 - 24
Economic Costs
ionships
s
Unit Costs
y
es
ies of Scale
Key Terms
long-run ATC
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End
Output
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9 - 25
ECONOMIES AND
DISECONOMIES OF SCALE
• Labor Specialization
Economic Costs
ionships
s
y
• Managerial
es
Specialization
ies of Scale
• Efficient Capital
Key Terms
• Other Factors
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Diseconomies of Scale
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End
Slide
Constant Returns to Scale
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9 - 26
graphically presented...
ECONOMIES AND
Economic Costs
ionships
s
Economies
y
of scale
Unit Costs

es
ies of Scale
Key Terms
long-run ATC
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End
Show Output
9 - 27
ECONOMIES AND
Economic Costs
ionships
s
Economies Constant returns
Short-Run Costs Graphicall of scale to scale
y
Unit Costs

es
ies of Scale
Key Terms
long-run ATC
Previous Next
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End
Show Output
9 - 28
ECONOMIES AND
Economic Costs
ionships
s
Economies Constant returns Diseconomies
Short-Run Costs Graphicall of scale to scale of scale
y
Unit Costs

es
ies of Scale
Key Terms
long-run ATC
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End
Show Output
9 - 29
ECONOMIES AND
Economic Costs
Where extensive
ionships
s
economies of
y
Unit Costs

es
scale exist
ies of Scale
Key Terms
long-run ATC
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End
Show Output
9 - 30
ECONOMIES AND
Economic Costs
ionships
s
y Where economies
Unit Costs

es
Long-Run Production Costs of scale are
quickly exhausted
ies of Scale
Key Terms
long-run ATC
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End
Show Output
9 - 31
MINIMUM EFFICIENT SCALE
AND INDUSTRY STRUCTURE
Economic Costs
Short-Run and Long-Run Minimum Efficient Scale -
MES
ionships
s
y Natural Monopoly
Applications & Illustrations
es
ies of Scale
•Rising Cost of Insurance and
Key Terms
Security
•Successful Start-Up Firms
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•The Verson Stamping Machine
Slide
End
Slide
•The Daily Newspaper
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9 - 32
•Aircraft and Concrete Plants
economic (opportunity) cost variable costs
explicit costs total cost
implicit costs average fixed cost (AFC)
normal profit average variable cost
economic profit (AVC)
short run average total cost (ATC)
long run marginal cost (MC)
total product (TP) economies of scale
marginal product (MP) diseconomies of scale
average product (AP) constant returns to scale
law of diminishing returns minimum efficient scale
fixed costs natural monopoly
Copyright McGraw-Hill/Irwin, 2005 BACK END
NEXT:
Economic Costs
ionships
Pure Competition
s
y
es
ies of Scale
Key Terms
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Chapter 10
9 - 34

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Economic Costs

Short-Run and Long-Run

Long-Run Production Costs

The Costs of Production

alternative goods and

• Required to attract &

Economic or Pure Profits

Economic profit 24000

Short run has fixed plant

Average Product (AP)

Previous Next 6 75 5 12.5

Previous Next Average

Previous Next Average

Previous Next Average

Total Variable Costs

Total Variable Costs

Total Cost Fixed Cost

Plotting Average and

Average Product and

All such plant capacities

Productivity and Cost Curv

Productivity and Cost Curv

Productivity and Cost Curv

Productivity and Cost Curv

Productivity and Cost Curv

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