University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) http://www2.hawaii.edu/~lindoj Gerard Russo Lecture #16 Thursday, March 4, 2004
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University of Hawai‘i at MānoaDepartment of Economics
ECON 130 (003): Principles of Economics (Micro)
http://www2.hawaii.edu/~lindojGerard RussoLecture #16
Thursday, March 4, 2004
ANNOUNCEMENTSREVIEW SESSIONThursday, March 18, 2004, 4:30-5:30 PM
BIL 152
MID-TERM EXAMINATION #2Tuesday, March 30, 2004, 12:00-1:15 PM
BIL 152
LECTURE 16Three Stages of ProductionCost TheoryTotal CostAverage CostMarginal Cost
L
L
Q
Q/L
•
•
•
L0 L1 L2
TP
APL
MPL
STAGE III
THREE STAGES OF SHORT-RUN PRODUCTION
STAGE I
STAGE II
Production & Cost DataLabor:L
Output:Q
AP L= Q/L
MPL=
∆Q/∆L
Total Cost$
AverageCost,$/Q
Marginal Cost,$/Q
0 0 - - 0 0 0
1 1 1 1 50,000 50,000 50,000
2 3 1.5 2 100,000 33,333 25,000
3 6 2.0 3 150,000 25,000 16,666
Short-Run Cost$
Q
Total Variable Cost
Short-Run Cost$
Q
Total Variable Cost
A •
0
R1 R2
R3
Q1
TVC1
Q2 Q3
TVC3
TVC2 Average Variable Costis minimized here.
Short-Run Total Variable Cost$
Q
Total Variable Cost
A •B
•
0 QA
Average Variable Costis minimized here.
QB
Marginal Costis minimized here.
Q
Q
$
$/Q
R•T
•
TVC
AVC
MC
Total Cost = Total Fixed Cost + Total Variable Cost
TC = TFC + TVCTC – TFC = TVCTC - TVC = TFCTC/Q = TFC/Q + TVC/QATC = AFC + AVCATC – AFC = AVCATC – AVC = AFC
Q
Q
$
$/Q
TFC
AFC
Average Fixed CostCurve is a RectangularHyperbola.
Q
Q
$
$/Q
R•T
•
TVC
AVC
MCATC
TFC
TC
•
$/Q
Q
MC ATC
AVC
AFCA•
0
C•
B•
•E
•F•G
Q*
TC equals the area of rectangle 0CEQ*.TVC equals the area of rectangle 0BFQ*.TFC equals the area of rectangle 0AGQ* .
TFC equals the area of rectangle BCEF.
TC= ? ; TVC = ? ; TFC = ?$/Q
Q
MC ATC
AVC•
•
0
A•
E•
B
C
D
TC = ? TVC = ? TFC = ?$/Q
Q
MC ATC
AVC
AFCA•0
C•B•
•E•F
•GQ*
LECTURE 16 (cont.)Economies of Scale (EOS)Long-Run Costs
Scale EffectsLong-Run v. Short-RunEconomies of ScaleEconomies of ScopeLong Run Production Q = f ( K, L )
Economies of Scale (EOS):An Example: circle with radius
R
R
Area=¶R2
Circumference=2¶R
Short-Run Average Cost Curves$/Q
Q0
ATC1 ATC2
ATC5
ATC4ATC3
Short-Run Average Cost Curves$/Q
Q0
ATC1 ATC2
ATC5
ATC4ATC3
Long-Run Average Total Cost Curve$/Q
Q0
•
•
•
LRATCATC1
ATC2
ATC3
ATC4
•
Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS)
$/Q
Q0
LRATC
Economies of Scale Diseconomies of Scale
QMES
Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS)
$/Q
Q0
LRATC
QMES
Economies of ScaleIncreasing Returns to Scale
Neither Economies norDiseconomies of ScaleConstant Returns to Scale
Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS)
$/Q
Q0
LRATC
QMES
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