Moritas Cost Curve (Sony Corp.) Akio Morita, founder of Sony
Corporation, drew this cost curve for transistor radios. He saw
that per-unit costs would fall initially and then rise. He turned
down an order for 100,000 units because he thought it would be
risky to increase production levels that high. He asked What if
there were no repeat order the next year?
Slide 3
Moritas Cost Curve (Sony Corp.) Sonys cost curve applied to a
short term. Short term in Economics means a period when some
factors of production are fixed Well start with Short term costs
and then look at long term costs
Slide 4
Explicit and Implicit Costs Explicit costs take the form of
explicit payments to suppliers of factors of production Examples:
workers wages managers salaries salespeoples commissions interest
payments to banks and other creditors fees for legal advice and
other services payments for energy and raw material
Slide 5
Explicit and Implicit Costs Implicit costs are opportunity
costs of using resources contributed by the firm or its owners
without explicit payments. Examples Labor of a small-business owner
Opportunity cost of small- business owners own savings invested in
a business Opportunity cost of capital invested by corporate
shareholders
Slide 6
Normal Profit Table shows the implicit and explicit costs of
the imaginary firm Fieldcom, Inc. Total revenue minus explicit
costs equals accounting profit. Subtracting implicit costs from
this quantity yields pure economic profit. The opportunity cost of
capital contributed by the owners can also be called normal profit.
Total Revenue $600,000 Less explicit costs: Wages and
salaries300,000 Materials and other100,000 _________ Equals
accounting profit $200,000 Less implicit costs: Owners forgone
salary 160,000 Opportunity cost of capital 20,000 _________ = pure
economic profit$ 20,000 (normal profit would be $ 0)
Slide 7
Fixed and Variable Costs Variable costs: Costs of inputs whose
quantities can be changed easily in the short run Fixed costs:
Costs of inputs whose quantities can be changed only in the long
run by increasing or decreasing the size of the firms plant Sunk
costs: One-time costs which, once made, cannot be recovered if the
firm goes out of business www.pdclipart.com
Slide 8
Marginal Physical Product Marginal physical product of labor is
the amount by which total output increases or decreases when the
quantity of labor increases by one unit
Slide 9
Law of Diminishing Returns According to the law of diminishing
returns, as the amount of one variable input is increased while the
amounts of all other inputs remain fixed, a point will be reached
beyond which the marginal physical product of the input will
decrease. Range of Diminishing Returns
Slide 10
Marginal Product Typical pattern for of Total Product &
Marginal Product:
Slide 11
Clicker According to the law of diminishing returns, as the
amount of one variable input is increased while the amounts of all
other inputs remain fixed: A.The marginal product will eventually
decline B.The marginal product will eventually become negative
C.The marginal product will increase at diminishing rates D.There
is no such law.
Slide 12
Marginal Costs Marginal cost (MC): the change in cost caused by
a change in output. When marginal cost is greater than average
cost, average cost rises -- ATC curve slopes up. When marginal cost
is below ATC, then ATC falls -- ATC curve slopes down.
Slide 13
Average and Marginal Costs
Slide 14
Definition of Costs Total Costs (TC) -- the expenses a business
has in supplying goods and/or services. Total Fixed Costs (TFC) --
payments to resources whose quantities can not be changed during a
fixed period of time the short run. (= total costs when Q=0) Total
Variable Costs (TVC) -- payments for additional resources used as
output increases. (=total costs total fixed costs) These costs are
relevant, but their curves will not be as important to us as the
next page.
Slide 15
Definition of Costs Average Fixed Cost -- the total fixed cost
divided by total output. (= total fixed costs/quantity) Average
total Cost (SRATC): -- the total cost of production divided by the
total quantity of output produced when at least one resource is
fixed (= total costs/quantity) Average Variable Cost -- total
variable cost divided by total output ( = total variable
cost/quantity) Marginal Cost -- Additional cost associated with
producing one more unit ( = Total Costs = Total Variable
Costs)
Slide 16
Marginal and Average Costs (1) Total Output (Q) (2) Total Fixed
Costs (TFC) (3) Total Variable Costs (TVC) (4) Total Costs (TC) (5)
Average Fixed Costs (AFC) (6) Average Variable Costs (AVC) (7)
Average Total Costs (ATC) (8) Marginal Costs (MC) 0$10$ 0$10 1
$20$10 $20$10 2 $18$28$5$9$14$8 3$10$25$35$3.33$8.33$11.6$7
4$10$30$40$2.5$7.5$10$5 5$10$35$45$2$7$9$5 6$10$42$52$1.66$7$8.66$7
7$10$50.6$60.6$1.44$7.2$8.6 8$10$60$70$1.25$7.5$8.75$9.4
9$10$80$90$1.1$8.8$10$20 A B
Slide 17
The marginal cost curve intersects the minimum points of the
average total cost and average variable cost curves
Marginal-Average Rule
Slide 18
Marginal and Average Cost Curves
Slide 19
Short vs. Long Run The short run refers to any period of time
during which at least one resource can not be changed. In the long
run, everything is variable nothing is fixed. The most important
difference between the short run and the long run is that the law
of diminishing marginal returns does not apply when all resources
are variable.
Slide 20
Economics of Scale Scale means size. Economies of scale: the
decrease in per unit costs as the quantity of production increases
and all resources are variable Diseconomies of scale: the increase
in per unit costs as the quantity of production increases and all
resources are variable Constant returns to scale: unit costs remain
constant as the quantity of production is increased and all
resources are variable
Slide 21
Economies of Scale and Long-Run Cost Curves In the long run, a
firm has many sizes to choose from. The short run requires that
scale be fixed only one or a few resources can be changed.
Slide 22
Long- and Short-Run Average Cost Curves Each plant size can be
represented by a U-shaped short-run average total cost curve. The
firms long-run average cost curve is the envelope of these and
other possible short-run average total cost curves it is a smooth
curve drawn so that it just touches the short-run curves without
intersecting any of them.
Slide 23
Short-Run and Long-Run Average-Cost Curves
Slide 24
Long-Run Average Total Cost Long-run average total cost
(LRATC): the smooth curve drawn so that it just touches the
short-run curves without intersecting any of them. The long-run
average total cost curve gets its shape from economies and
diseconomies of scale. NOT from diminishing marginal returns
Slide 25
Shape of LRATC If producing each unit of output becomes less
costly there are economies of scale. If producing each unit of
output becomes more costly there are diseconomies of scale. If unit
costs remain constant as output rises there are constant returns to
scale.
Slide 26
Long-Run Average Cost Curve
Slide 27
Long-Run and Short-Run Cost Curves (1)
Slide 28
Long-Run and Short-Run Cost Curves (2) In some unusual cases
Economies of Scale may prevail over the entire range of an
industrys realistic market scale. In this case, one very large firm
would be the natural outcome and the most efficient use of
resources.
Slide 29
Long-Run and Short-Run Cost Curves (3) In some rare cases scale
may not be relevant at all. Firms of various sizes could compete
with each other without any cost advantage from economies of
scale.
Slide 30
Minimum Efficient Scale Most industries experience both
economies and diseconomies of scale. The minimum efficient scale
(MES) is the minimum point of the long-run average-cost curve; the
output level at which the cost per unit of output is the lowest.
The MES varies considerably across industries.