22 - 1 Copyright McGraw-Hill/Irwin, 2005 Economic Costs Short-Run and Long -Run Short-Run Producti on Relationships Short-Run Producti on Costs Short-Run Costs Gr aphically Productivity and C ost Curves Long-Run Productio n Costs Economies and Diseconomies of Scale Minimum Efficient Scale and Industry Structure Key Terms Previo us Slide Next Slid e End Show The Costs of Production 22 C H A P T E R
22 - 1 Copyright McGraw-Hill/Irwin, 2005 Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run.
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22 - 1Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
The Costs of Production
22C H A P T E R
22 - 2Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
Average Product (AP)
Total Product (TP)Marginal Product (MP)
SHORT-RUN PRODUCTIONRELATIONSHIPS
Marginal Product =Change in Total Product
Change in Labor Input
Average Product =Total Product
Units of Labor
22 - 3Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
PRODUCTIVITY AND COST CURVES
Co
sts
(d
olla
rs)
Ave
rag
e p
rod
uct
an
dm
arg
inal
pro
du
ctQuantity of labor
Quantity of output
MPAP
MCAVC
22 - 4Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
Law of Diminishing Returns
SHORT-RUN PRODUCTIONRELATIONSHIPS
Tota
l Pro
du
ct, T
P
Quantity of Labor
Ave
rag
e P
rod
uct
, AP,
an
dM
arg
inal
Pro
du
ct, M
P
Quantity of Labor
Total Product
MarginalProduct
AverageProduct
IncreasingMarginalReturns
22 - 5Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
Law of Diminishing Returns
SHORT-RUN PRODUCTIONRELATIONSHIPS
Tota
l Pro
du
ct, T
P
Quantity of Labor
Ave
rag
e P
rod
uct
, AP,
an
dM
arg
inal
Pro
du
ct, M
P
Quantity of Labor
Total Product
MarginalProduct
AverageProduct
DiminishingMarginalReturns
22 - 6Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
Law of Diminishing Returns
SHORT-RUN PRODUCTIONRELATIONSHIPS
Tota
l Pro
du
ct, T
P
Quantity of Labor
Ave
rag
e P
rod
uct
, AP,
an
dM
arg
inal
Pro
du
ct, M
P
Quantity of Labor
Total Product
MarginalProduct
AverageProduct
NegativeMarginalReturns
22 - 7Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
Fixed CostsTotal Fixed Costs
Average Fixed Costs =Total Fixed Costs
Quantity
Variable CostsTotal Variable Costs
Average Variable Costs =Total Variable Costs
Quantity
SHORT-RUN PRODUCTION COSTS
22 - 8Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow Marginal Cost = MC
Total Fixed Costs = TFCTotal Variable Costs = TVC
Average Variable Costs = AVC
Total Costs = TC
Average Total Costs = ATC
Average Fixed Costs = AFC
Summary of DefinitionsSHORT-RUN PRODUCTION COSTS
22 - 9Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
SHORT-RUN COSTS GRAPHICALLY
Quantity
Co
sts
(do
llar
s)
TC
TotalCost
Fixed CostTVC
Variable Cost
TFC
Combining TVCWith TFC to get
Total Cost
22 - 10Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
ECONOMIC COSTSEconomic Costs or
Opportunity CostsForgoing the opportunity to produce alternative goods and servicesExplicit Costs
Implicit Costs
22 - 11Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
•Treated as a cost•Required to attract & retain resources
Economic or Pure Profits
EconomicProfit
TotalRevenue
Economic Cost
Normal ProfitsECONOMIC COSTS
22 - 12Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
EconomicProfit
Implicit costs(including a
normal profit)
ExplicitCosts
Accountingcosts (explicit
costs only)
AccountingProfit
Ec
on
om
ic (
op
po
rtu
nit
y) C
os
ts
TOTAL
REVENUE
Profits to anEconomist
Profits to anAccountant
ECONOMIC COSTS
22 - 13Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
Total CostTotal Fixed and Variable Costs
Average Total Cost =Total Costs
Quantity
Marginal CostTotal Variable Costs
Marginal Cost =Change in Total Costs
Change in Quantity
SHORT-RUN PRODUCTION COSTS
22 - 14Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
SHORT-RUN COSTS GRAPHICALLY
Quantity
Co
sts
(do
llar
s)
AFC
AVCATC
MC
Plotting Average andMarginal Costs
22 - 15Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
LONG-RUN PRODUCTION COSTS
All such plant capacitiescan be plotted.
For every plant capacity size...
there is a short-run ATC curve.
22 - 16Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
SHORT RUN AND LONG RUN
Accounting: Short and long run is based upon annual chronology.
Economics:Short run has fixed plant capacity size.Long run has variable plant capacity size.
22 - 17Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
LONG-RUN PRODUCTION COSTS
The long-run ATC just “envelopes”all of the short-run ATC curves.
Un
it C
ost
s
Output
22 - 18Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
LONG-RUN PRODUCTION COSTS
Un
it C
ost
s
Output
long-run ATC
22 - 19Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production Relationships
Short-Run Production Costs
Short-Run Costs Graphically
Productivity and Cost Curves
Long-Run Production Costs
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Key Terms
PreviousSlide
NextSlide
EndShow
ECONOMIES ANDDISECONOMIES OF SCALE
Un
it C
ost
s
Output
long-run ATC
Economiesof scale
Diseconomiesof scale
Constant returnsto scale
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