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QQQQ TFC TFCTFC TVC TVCTVC TC TTCCTC MC MMCCMC AFC …fuangfah.econ.cmu.ac.th/teacher/piyalukc/Econ301/PPT301/7 Cost of... · qqqq tfc tfctfc tvc tvctvc tc ttcctc mc mmccmc afc afcafc

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QQQQ TFCTFCTFCTFC TVCTVCTVCTVC TCTCTCTC MCMCMCMC AFCAFCAFCAFC AVCAVCAVCAVC ATCATCATCATC

0 50 0 50 -- -- -- --0 50 0 50 -- -- -- --

1 50 50 100 50 50 50 100

2 50 78 128 28 25 39

3 50 98 148 16.7 32.7 49.3

4 50 112 162 14 12.5 28 40.5

5 130 180 18 10 26 36

6 50 150 200 20 8.3 25 33.3

7 50 175 225 25 7.1 25 32.17 50 175 225 25 7.1 25 32.1

8 50 204 254 29 6.3 25.5 31.8

9 50 242 292 38 5.6 26.9 32.4

10 50 350 58 30 35

11 50 385 435 85 4.5 35 39.5

22222222. Cost in the Short Run. Cost in the Short Run. Cost in the Short Run. Cost in the Short Run. Cost in the Short Run. Cost in the Short Run. Cost in the Short Run. Cost in the Short Run

Total cost

TVC

TC

Q

Total cost

TFC

MC

Fig 7.1Cost Curves for a firm

Q

Average cost

AVC

ATC

TP=Q

L L

TVC w LMC

∆ ∆= =

L

wMC

MP=

TVC w LMC

Q Q

∆ ∆= =

∆ ∆

Diminishing IncreasingDiminishing Marginal Returns

IncreasingMarginal Cost

33333333. Cost in the Long Run. Cost in the Long Run. Cost in the Long Run. Cost in the Long Run. Cost in the Long Run. Cost in the Long Run. Cost in the Long Run. Cost in the Long Run

Total cost in the long run = Total variable costTotal cost in the long run = Total variable cost

The cost minimizing input choiceThe cost minimizing input choice

How many K and L will be used How many K and L will be used How many K and L will be used to minimize the total costHow many K and L will be used to minimize the total cost

IsocostIsocostIsocostIsocostIsocostIsocostIsocostIsocost line line line line line line line line Graph showing all possible combinations of labor and capital that can be purchased for a given total cost.

C = wL + rK

K = C/r – [w/r]L

intercept slopeintercept slope

Fig Fig Fig Fig Fig Fig Fig Fig 77777777........3 3 3 3 3 3 3 3 Producing a Given Output at Minimum Producing a Given Output at Minimum Producing a Given Output at Minimum Producing a Given Output at Minimum Producing a Given Output at Minimum Producing a Given Output at Minimum Producing a Given Output at Minimum Producing a Given Output at Minimum CostCostCostCostCostCostCostCost

K

A

BK2

K1

What is the condition at point A?

L

q1

E

L1 L3L2

K3

Question?Question?Question?Question?Question?Question?Question?Question?

Let K/L is capital-labor ratio used in a production. In developed countries, labor is more expensive than capital. Therefore, we observed that K/L in those countries is high (capital-intensive). Use the cost minimizing input choice to explain this.

Cost Minimization with varying output levels

Expansion path Expansion path Expansion path Expansion path Expansion path Expansion path Expansion path Expansion path

Curve passing through points of tangency between a firm’s isocost lines and its isoquants.

44444444. Long Run Versus Short Run Cost Curve. Long Run Versus Short Run Cost Curve. Long Run Versus Short Run Cost Curve. Long Run Versus Short Run Cost Curve. Long Run Versus Short Run Cost Curve. Long Run Versus Short Run Cost Curve. Long Run Versus Short Run Cost Curve. Long Run Versus Short Run Cost Curve

N

Fig 7.7

The Inflexibility of Short-Run Production

M

Fig Fig Fig Fig Fig Fig Fig Fig 77777777........9 9 9 9 9 9 9 9 Relationship between SR and LR costRelationship between SR and LR costRelationship between SR and LR costRelationship between SR and LR costRelationship between SR and LR costRelationship between SR and LR costRelationship between SR and LR costRelationship between SR and LR cost Economies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of Scale

1.1.1.1. Economies of scale (decreasing AC) Economies of scale (decreasing AC) Economies of scale (decreasing AC) Economies of scale (decreasing AC) Situation in which output can be doubled for less than a doubling of cost.

2.2.2.2. Diseconomies of scale (increasing AC) Diseconomies of scale (increasing AC) Diseconomies of scale (increasing AC) Diseconomies of scale (increasing AC) Situation in which a doubling of output requires more than a doubling of cost.

Measuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of Scale

Ec = percentage change in C = ∆C/C = MCEc = percentage change in C = ∆C/C = MCpercentage change in q ∆q/q AC

� Ec > 1 diseconomies of scale (MC>AC)

� Ec < 1 economies of scale (MC<AC)

� Ec = 1 neither (MC=AC)

55555555. Production With Two Outputs. Production With Two Outputs. Production With Two Outputs. Production With Two Outputs. Production With Two Outputs. Production With Two Outputs. Production With Two Outputs. Production With Two Outputs--------Economies of Economies of Economies of Economies of Economies of Economies of Economies of Economies of ScopeScopeScopeScopeScopeScopeScopeScope

Fig 7.10

Production Transformation Curve

Curve showing the various combinations of two different outputs different outputs (products) that can be produced with a given set of inputs.

Economies and Diseconomies of ScopeEconomies and Diseconomies of ScopeEconomies and Diseconomies of ScopeEconomies and Diseconomies of ScopeEconomies and Diseconomies of ScopeEconomies and Diseconomies of ScopeEconomies and Diseconomies of ScopeEconomies and Diseconomies of Scope

1.1.1.1. Economies of scope Economies of scope Economies of scope Economies of scope Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product.when each produces a single product.

2.2.2.2. Diseconomies of scope Diseconomies of scope Diseconomies of scope Diseconomies of scope Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product.

Measuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of ScaleMeasuring Economies of Scale

Sc = C(x)+C(y)-C(x,y) C(x,y)

� Sc > o Economies of scope

� Sc < 0 Diseconomies of scope

I. "Even though I hate my Economics classes, I can't quit because I've spent so much money on tuition."

a) I only

b) Neither I nor II

I've spent so much money on tuition." II. "To break into the market for soap our firm needs to spend

$10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account."

c) II only

d) Both I and II

a) 200

b) 5 + (200/Q) b) 5 + (200/Q)

c) 5Q

d) 5

� Refer to Scenario 1. The total cost to � Refer to Scenario 1. The total cost to produce 100 cookies is

a) $0.25

b) $100.00

c) $25.00

d) $0.10

� Refer to Scenario 1. The total cost to � Refer to Scenario 1. The total cost to produce 50 cookies is

a) $60

b) $20

c) $25

d) $50

� Refer to Scenario 1. For 100 cookies, the � Refer to Scenario 1. For 100 cookies, the average total cost is

a) rising.

b) neither rising nor falling.

c) falling.

d) less than average fixed cost.

a) the income-consumption curve.

b) the price-consumption curve.

c) the long-run total cost curve.

d) the expansion path.

a) the slopes of the isoquant and isocost curves a) the slopes of the isoquant and isocost curves are equal.

b) the marginal rate of technical substitution equals the ratio of input prices.

c) costs are minimized for the production of a given output.

d) all of the above d) all of the above

a) could reduce the cost of producing its current output level by employing more capital and less labor.

b) could increase its output at no extra cost by employing more capital and less labor.

c) could reduce the cost of producing its current output level by employing more labor and less capital. level by employing more labor and less capital.

d) is producing its current output level at the minimum cost.

a) a horizontal line.

b) a vertical line.

c) equal to the 45-degree line from the origin.

d) not defined.

a) opportunity costs are taken into account in the short run.

b) diminishing returns apply in the short run.

c) all inputs are variable in the long run. Then there are at least as many possibilities for substitution between factors of production in the long run as in the short run.the long run as in the short run.

d) returns to scale only exist in the long run.

a) bowed inward (convex).

b) bowed outward (concave).

c) a straight line.

d) a rectangle.

a) fall to a minimum and then rise.

b) increase.

c) remain constant.

d) decline.