8 - 1 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 The Costs of Production

8 - 2 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 ECONOMIC COSTS Explicit + Implicit costs Explicit costs Monetary payments to others Implicit costs Opportunity costs of owner Self-owned resources Self-employed resources

8 - 3 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 PROFITS Accounting profit –Total revenue minus explicit cost Economic profit –Total revenue minus implicit and explicit costs –Normal Profit = Implicit costs

8 - 4 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 Economic Profit Implicit Costs (normal profit) Explicit Costs Explicit Costs Accounting Profit Economic (opportunity) Costs TOTALREVENUETOTALREVENUE Profits to an Economist Profits to an Accountant ECONOMIC COSTS

8 - 5 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 SHORT RUN AND LONG RUN The short run –Fixed plant capacity –Variable plant usage –Variable output The long run –Variable plant capacity –Firms enter and exit

8 - 6 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 Average Product (AP) Total Product (TP) Marginal Product (MP) SHORT-RUN PRODUCTION RELATIONSHIPS Marginal Product = Change in Total Product Change in Labor Input Average Product = Total Product Units of Labor

8 - 7 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 Fixed Costs (TFC or AFC) Total Fixed Costs Average Fixed Costs = Total Fixed Costs Quantity Variable Costs (TVC or AVC) Total Variable Costs Average Variable Costs = Total Variable Costs Quantity SHORT-RUN PRODUCTION COSTS

8 - 8 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 Total Cost (TC & ATC) Total Fixed + Total Variable Costs Average Total Cost = Total Costs Quantity Marginal Cost (MC) Total Variable Costs Marginal Cost = Change in Total Costs Change in Quantity SHORT-RUN PRODUCTION COSTS

8 - 9 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 Marginal Cost = MC Total Fixed Costs = TFC Total Variable Costs = TVC Average Variable Costs = AVC Total Costs = TC Average Total Costs = ATC Average Fixed Costs = AFC Summary SHORT-RUN PRODUCTION COSTS

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 Test Scores If your current average is 86% and you scored a 73% on the most recent test, did your class average go up or down? Down

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 Test Scores Your average grade is a 64%. You scored an 82% on the marginal assignment. What happened to your average grade? It went up.

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 Production If your MP is higher than your AP then… AP goes up. If your MP is lower than your AP then… AP goes down. The same is true for MC and AVC.

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 PRODUCTIVITY AND COST CURVES P AP and MP Q of Labor Q MP AP MC AVC

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 SHORT-RUN COSTS GRAPHICALLY Q P TC Total Cost Fixed Cost TVC Variable Cost TFC Combining TVC With TFC to get Total Cost

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 SHORT-RUN COSTS GRAPHICALLY Q P AFC AVC ATC MC Plotting Average and Marginal Costs

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 Law of Diminishing Marginal Returns As more of a variable resource is added to a fixed resource, at some point, the MP of the variable resource will decline.

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

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

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

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 Negative Marginal Returns

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 SHORT-RUN COSTS GRAPHICALLY Q P AFC AVC ATC MC

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 LONG-RUN PRODUCTION COSTS All such plant capacities can be plotted. For every plant capacity size there is a short-run ATC curve.

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 LONG-RUN PRODUCTION COSTS P Q

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 LONG-RUN PRODUCTION COSTS P Q

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 LONG-RUN PRODUCTION COSTS The long-run ATC just “envelopes” all of the short-run ATC curves. P Q

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 LONG-RUN PRODUCTION COSTS LRATC P Q

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 ECONOMIES OF SCALE Learning by Doing Labor Specialization Managerial Specialization Efficient Capital Other Factors Diseconomies of Scale Constant Returns to Scale graphically presented...

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 ECONOMIES AND DISECONOMIES OF SCALE P Q LRATC Economies of scale

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 ECONOMIES AND DISECONOMIES OF SCALE LRATC Economies of scale Constant returns to scale P Q

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 ECONOMIES AND DISECONOMIES OF SCALE LRATC Economies of scale Diseconomies of scale Constant returns to scale P Q

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 MINIMUM EFFICIENT SCALE AND INDUSTRY STRUCTURE Minimum Efficient Scale – MES Lowest output where you minimize cost

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 LONG-RUN PRODUCTION COSTS P Q LRATC