Warm-Up, 10/24 Marginal cost always intersects average variable cost at A.The profit-maximizing quantity B.The minimum of marginal cost C.The maximum of average variable cost D.The minimum of average variable cost E.The maximum of marginal cost

The Costs of Production (21) Day 3

Go over homework Alas, tomorrow I must draw out the lesson… Like an ol’OT

Extra Credit—up to a 2.32% increase in your average Alas, tomorrow I must draw out the lesson… Like an ol’OT Have a story to present tomorrow which includes the following: 1.15 terms spread among all the chapters we have covered 2.A minimum of 600 words 3.An Aristotelian or Magical Realist Plot 4. At least three standing ovations from the class following uproarious laughter

Questions to answer today?! 1.What are all the measures of cost relevant to a firm? 2.What are the differences between short run and long run? 3.Economies of scale—what IS that?

Relationship Between Marginal Cost and Average Total Cost uWhenever marginal cost is less than average total cost, average total cost is falling. uWhenever marginal cost is greater than average total cost, average total cost is rising.

Relationship Between Marginal Cost and Average Total Cost The marginal-cost curve crosses the average-total-cost curve at the efficient scale. u Efficient scale is the quantity that minimizes average total cost.

MC ATC Relationship Between Marginal Cost and Average Total Cost $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $ Quantity of Output (glasses of lemonade per hour) Costs

The Various Measures of Cost It is now time to examine the relationships that exist between the different measures of cost.

The Various Measures of Cost Big Bob’s Bagel Bin

Big Bob’s Cost Curves... $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 $ Quantity of Output (bagels per hour) Total Cost Total Cost Curve

AFC AVC MC Big Bob’s Cost Curves Quantity of Output Costs ATC

Three Important Properties of Cost Curves uMarginal cost eventually rises with the quantity of output. uThe average-total-cost curve is U- shaped. uThe marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

Costs in the Long Run u For many firms, the division of total costs between fixed and variable costs depends on the time horizon being considered. u In the short run some costs are fixed. u In the long run fixed costs become variable costs.

Consequences of the Long Run u In the long run, firms can go out of business or change their scale… u They will choose the scale that maximizes their profits

Costs in the Long Run Because many costs are fixed in the short run but variable in the long run, a firm’s long-run cost curves differ from its short-run cost curves.

Average Total Cost in the Short and Long Runs... Quantity of Cars per Day 0 Average Total Cost ATC in short run with small factory ATC in short run with medium factory ATC in short run with large factory ATC in long run

Economies and Diseconomies of Scale uEconomies of scale occur when long-run average total cost declines as output increases. uDiseconomies of scale occur when long- run average total cost rises as output increases. uConstant returns to scale occur when long-run average total cost does not vary as output increases.

Economies and Diseconomies of Scale Diseconomies of scale Quantity of Cars per Day 0 Average Total Cost ATC in long run Economies of scale Constant Returns to scale