1. Costs
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2. Drawing on Chapter 10
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3. Outline Costs in the short run
Allocating production between two processes
The relationship among MP, AP, MC, and AVC
Costs in the long run
Long-run costs and the structure of industry
The relationship between long-run and short-run cost curves
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4. Costs In The Short Run Suppose Output Q=F(K,L) K the fixed input
L the variable input
Their respective prices r and w
Then
Fixed cost: FC = rK0
Variable cost (VC): VCQ = wL
Total cost:
TC = FC+VCQ = rK0+wL
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5. Figure 10.1: Output as a Function of One Variable Input
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6. Figure 10.2: The Total, Variable, and Fixed Cost Curves
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7. Figure 10.3: The Production Function Q = 3KL, with K = 4
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8. Figure 10.4: The Total, Variable, and Fixed Cost Curves for the Production Function Q-3KL
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9. Unit Costs In The Short Run
Average costs
Average fixed cost:
𝑨𝑭𝑪 𝑸 = 𝑭𝑪 𝑸
Average variable cost:
𝑨𝑽𝑪 𝑸 = 𝑽𝑪 𝑸 𝑸
Average total cost: 𝑨𝑻𝑪 𝑸 = 𝑻𝑪 𝑸 𝑸
= 𝑨𝑭𝑪 𝑸 + 𝑨𝑽𝑪 𝑸
Marginal cost
𝑴𝑪 𝑸 = ∆ 𝑽𝑪 𝑸 ∆𝑸 = ∆ 𝑻𝑪 𝑸 ∆𝑸
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10. Figure 10.5: The Marginal, Average Total, Average Variable, and Average Fixed Cost Curves
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11. Figure 10.6: Quantity vs. Average Costs
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12. Figure 10.7: Cost Curves for a Specific Production Process
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13. Figure 10.8: The Minimum Cost Production Allocation Among Processes
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14. Figure 10.9: The Relationship Between MP, AP, MC, and AVC
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15. Costs In The Long Run Let C measure the cost of production.
We assume that each firm minimizes its cost, C, of producing a given amount of output, say Q0.
Why is this reasonable?
An isocost line shows the set of input bundles with a given cost, say C0.
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16. Figure 10.10: The Isocost Line
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17. Figure 10.11: The Maximum Output for a Given Expenditure
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18. Figure 10.12: The Minimum Cost for a Given Level of Output
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19. Figure 10.13: Different Ways of Producing 1 Ton of Gravel
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20. The Relationship Between Optimal Input Choice And Long-run Costs
How do costs (total, average, and marginal) change across possible output levels for a particular production process?
The output expansion path traces out minimum cost input combinations in the isoquant map with isocost lines of given slope and increasing cost and output.
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21. Figure 10.15: The Long-Run Expansion Path
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22. Figure 10.16: The Long-Run Total, Average, and Marginal Cost Curves
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23. The Relationship Between Optimal Input Choice And Long-run Costs
With _____ returns to scale, as output grows, inputs and LR total cost grow _____ proportionally, so LR average and marginal cost are _____.
Constant
exactly constant
Decreasing
more than increasing
Increasing
less than decreasing
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24. Figure 10.17: The LTC, LMC and LAC Curves with Constant Returns to Scale
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25. Figure 10.18: The LTC, LAC and LMC Curves for a Production Process with Decreasing Returns to Scale
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26. Figure 10.19: The LTC, LAC and LMC Curves for a Production Process with Increasing Returns to Scale
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27. Long-run Costs And The Structure Of Industry
The number of firms in an industry depends on the minimum efficient scale of production: the minimum output level at which LAC is minimized.
Natural monopoly: an industry whose market output is produced at the lowest cost when production is concentrated in the hands of a single firm.
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28. Figure 10.20: LAC Curves Characteristic of Highly Concentrated Industrial Structures
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29. Figure 10.21: LAC Curves Characteristic of Unconcentrated Industry Structures
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30. Figure 10.22: The Family of Cost Curves Associated with a U-Shaped LAC
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