DR. PETROS KOSMAS LECTURER VARNA FREE UNIVERSITY ACADEMIC YEAR LECTURE 5 MICROECONOMICS AND MACROECONOMICS ECO-1067

The Costs of Production ECO-1067 Economic Costs or Opportunity Costs  Forgoing the opportunity to produce alternative goods and services Explicit Costs Implicit Costs

ECONOMIC COSTS Treated as a cost Required to attract & retain resources Economic or Pure Profits Economic Profit Total Revenue Economic Cost ECO-1067

Profits to an Economist Economic Profit Implicit costs (including a normal profit) Explicit Costs Economic (opportunity) Costs Profits to an Accountant Accounting Profit Accounting costs (explicit costs only) TOTALREVENUETOTALREVENUE ECONOMIC COSTS ECO-1067

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. ECO-1067

Total Product (TP) Marginal Product (MP) SHORT-RUN PRODUCTION RELATIONSHIPS Marginal Product = Change in Total Product Change in Labor Input Average Product (AP) Average Product = Total Product Units of Labor ECO-1067

SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Increasing Marginal Returns Total Product, TP Total Product Quantity of Labor Average Product Marginal Product Average Product, AP, and Marginal Product, MP ECO-1067

SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product, TP Total Product Quantity of Labor Average Product Marginal Product Average Product, AP, and Marginal Product, MP Diminishing Marginal Returns ECO-1067

SHORT-RUN PRODUCTION RELATIONSHIPS Law of Diminishing Returns Total Product, TP Total Product Quantity of Labor Average Product Marginal Product Average Product, AP, and Marginal Product, MP Negative Marginal Returns ECO-1067

SHORT-RUN PRODUCTION RELATIONSHIPS Fixed Costs Total Fixed Costs Average Fixed Costs = Total Fixed Costs Quantity Variable Costs Total Variable Costs Average Variable Costs = Total Variable Costs Quantity ECO-1067

SHORT-RUN PRODUCTION RELATIONSHIPS Total Cost Total Fixed and Variable Costs Average Total Cost = Total Costs Quantity Marginal Cost Total Variable Costs Marginal Cost = Change in Total Costs Change in Quantity ECO-1067

SHORT-RUN PRODUCTION COSTS Summary of Definitions Total Fixed Costs = TFC Total Variable Costs = TVC Total Costs = TC Average Fixed Costs = AFC Average Variable Costs = AVC Average Total Costs = ATC Marginal Cost = MC ECO-1067

Variable Cost Total Cost Combining TVC With TFC to get Total Cost Costs (Euros) TC TVC Fixed Cost Quantity SHORT-RUN PRODUCTION COSTS ECO-1067

ATC AVC AFC Plotting Average and Marginal Costs Costs (dollars) Quantity SHORT-RUN PRODUCTION COSTS ECO-1067

ECONOMIES AND DISECONOMIES OF SCALE Labor Specialization Managerial Specialization Efficient Capital Other Factors Diseconomies of Scale Constant Returns to Scale ECO-1067

Economies of scale Constant returns to scale Diseconomies of scale Unit Costs Output ECONOMIES AND DISECONOMIES OF SCALE ECO-1067