University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) Gerard Russo Lecture.

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University of Hawai‘i at Mānoa Department of Economics ECON 130 (003): Principles of Economics (Micro) Gerard Russo Lecture #16 Thursday, March 4, 2004

ANNOUNCEMENTS REVIEW SESSION Thursday, March 18, 2004, 4:30-5:30 PM BIL 152 MID-TERM EXAMINATION #2 Tuesday, March 30, 2004, 12:00-1:15 PM BIL 152

LECTURE 16 Three Stages of Production Cost Theory Total Cost Average Cost Marginal Cost

L L Q Q/L L0L0 L1L1 L2L2 TP AP L MP L STAGE III THREE STAGES OF SHORT-RUN PRODUCTION STAGE I STAGE II

Production & Cost Data Labor :L Output: Q AP L = Q/L MP L = ∆Q/∆L Total Cost $ Average Cost,$/Q Marginal Cost,$/Q , ,00033,33325, ,00025,00016,666

Short-Run Cost $ Q Total Variable Cost

Short-Run Cost $ Q Total Variable Cost A 0 R1R1 R2R2 R3R3 Q1Q1 TVC 1 Q2Q2 Q3Q3 TVC 3 TVC 2 Average Variable Cost is minimized here.

Short-Run Total Variable Cost $ Q Total Variable Cost A B 0 QAQA Average Variable Cost is minimized here. QBQB Marginal Cost is minimized here.

Q Q $ $/Q R T TVC AVC MC

Total Cost = Total Fixed Cost + Total Variable Cost TC = TFC + TVC TC – TFC = TVC TC - TVC = TFC TC/Q = TFC/Q + TVC/Q ATC = AFC + AVC ATC – AFC = AVC ATC – AVC = AFC

Q Q $ $/Q TFC AFC Average Fixed Cost Curve is a Rectangular Hyperbola.

Q Q $ $/Q R T TVC AVC MC ATC TFC TC

$/Q Q MC ATC AVC AFC A 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 AFC A 0 C B E F G Q*

LECTURE 16 (cont.) Economies of Scale (EOS) Long-Run Costs

Scale Effects Long-Run v. Short-Run Economies of Scale Economies of Scope Long Run Production Q = f ( K, L )

Economies of Scale (EOS): An Example: circle with radius R R Area=¶R 2 Circumference=2¶R

Short-Run Average Cost Curves $/Q Q 0 ATC 1 ATC 2 ATC 5 ATC 4 ATC 3

Short-Run Average Cost Curves $/Q Q 0 ATC 1 ATC 2 ATC 5 ATC 4 ATC 3

Long-Run Average Total Cost Curve $/Q Q 0 LRATC ATC 1 ATC 2 ATC 3 ATC 4

Minimum Efficient Scale (MES) Minimum Optimal Scale (MOS) $/Q Q 0 LRATC Economies of Scale Diseconomies of Scale Q MES

Minimum Efficient Scale (MES) Minimum Optimal Scale (MOS) $/Q Q 0 LRATC Q MES Economies of Scale Increasing Returns to Scale Neither Economies nor Diseconomies of Scale Constant Returns to Scale

Minimum Efficient Scale (MES) Minimum Optimal Scale (MOS) $/Q Q 0 LRATC Q MES