Cost & Production Theory Firms seek to produce any given quantity of output (Q) at lowest cost....
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Transcript of Cost & Production Theory Firms seek to produce any given quantity of output (Q) at lowest cost....
![Page 1: Cost & Production Theory Firms seek to produce any given quantity of output (Q) at lowest cost. Firms are cost minimizers.](https://reader035.fdocuments.us/reader035/viewer/2022081821/56649f005503460f94c16bb5/html5/thumbnails/1.jpg)
Cost & Production Theory
Firms seek to produce any given quantity of output (Q) at lowest cost.
Firms are cost minimizers.
![Page 2: Cost & Production Theory Firms seek to produce any given quantity of output (Q) at lowest cost. Firms are cost minimizers.](https://reader035.fdocuments.us/reader035/viewer/2022081821/56649f005503460f94c16bb5/html5/thumbnails/2.jpg)
Costs C = rK + wL r is the price of capital, w is the wage Cost is the sum of each input quantity
multiplied by its price when input prices reflect all costs including opportunity costs
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Economic Costs are Opportunity Costs Economic Cost includes both
implicit and explicit costs Explicit Costs – payment to others Implicit Costs – cost of owned
inputs, or other costs that do not generate explicit payments
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Costs and Output Long-Run Total Cost or LTC
Combinations of Cost and Output Q (C1,Q1), (C2,Q2), (C3,Q3)
Long-run average cost LAC = (LTC/Q)
Long-run marginal cost LMC = ΔLTC/ΔQ
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Short-run vs. Long-run Long-run: all inputs variable Short-run: one or more inputs fixed
Total Product: Q = f(K0,L) Average Product of Labor: APL = Q/L Marginal Product of Labor: MPL = ΔQ/ΔL
Law of diminishing marginal product As more labor is employed with a fixed
amount of capital, labor’s marginal product (MPL) eventually declines
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Watch the video Microeconomics The Law of
Diminishing Returns: Econ Concepts in 60 Seconds http://youtu.be/M7rA4VfvdAw
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Short-run Costs Total Cost = rK0 + wL = TC Total Fixed Cost = rK0 = TFC Total Variable Cost = wL = TVC TC = TFC + TVC Average Fixed Cost: AFC = TFC/Q Average Variable Cost: AVC = TVC/Q Average Total Cost: ATC = TC/Q
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Short-run Marginal Cost SMC = ΔTC/ΔQ
ΔTFC/ΔQ = 0 SMC = ΔTVC/ΔQ = ΔTC/ΔQ
SMC = AVC at its minimum SMC = ATC at its minimum
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Watch the videos Episode 23: Cost Curves
http://youtu.be/UI-LL8-dVAs
Cost Curves MC, ATC, AVC, and AFC: Econ Concepts in 60 Seconds http://youtu.be/S3iLMfm6CGY
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Short-run Cost & Product AVC and MC are inversely related
to APL and MPL MPL > APL implies MC < AVC Max MPL corresponds to Min MC MPL = APL implies MC = AVC MPL < APL implies MC > AVC
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Short-run and Long-run Cost Short-run and long-run costs are
equal ONLY at a long-run optimum The quantity where short-run fixed K0
minimizes long run cost ATC = LAC
Only at the minimum of LAC are all average and marginal costs equal LAC = LMC = ATC = SMC
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Watch the video 9.2 - Long-Run Cost Structure
http://youtu.be/8I6BIuCGuaE
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Economies of Scale Economies of scale: LAC is decreasing
Costs increase less than proportionately with output
Diseconomies of scale: LAC increasing Costs increase more than proportionately
with output Constant returns to scale: LAC = LMC
Costs increase exactly in proportion to output Minimum Efficient Scale or MES
The quantity at which economies of scale end and constant returns begin
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Watch the video Economies and Diseconomies of
Scale.mp4 http://youtu.be/6TW-o1NqV0I
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Economies of Scope A firm can produce two products
together more cheaply than producing each product separately, or C(X,Y) < C(X) + C(Y)