1. Economies of Scale Chapter 13 completion

2. The Shape of Cost Curves Quantity of Output Costs $3.00 2.50 2.00 1.50 1.00 0.50 04268141210 MC ATC AVC AFC Note how MC hits both ATC & AVC at their minimum When MC average total cost is falling When MC > ATC => average total cost is rising AFC always declines: Fixed Costs spread over more output ATC is U-shaped Due to high fixed costs

3. Finding Economic Profit 1) Profit = TR – TC There are several formulas to calculate profit: 2) Profit = (Price – ATC) X Qty (most useful formula) Market Price = P 1 If P 1 > ATC => Economic Profit If P 1 Economic Loss

4. Practice Test Page 1

5. Economies of Scale Economies of scale- –ATC falls as output increases –Allows for specialization of workers –Leads to more productivity per worker Diseconomies of scale- –ATC rises as output increases –coordination problems eventually arise as firms grow in size Constant returns to scale- –ATC stays the same as output increases

6. Short Run vs. Long Run Costs Costs depends on the time horizon considered –In the short run, some costs are fixed –In the long run, all fixed costs become variable costs –Why: Firms have time to change both plant size & labor force Therefore, long-run cost curves differ from short-run cost curves

7. Long Run ATC Quantity of Cars per Day 0 Average Total Cost 1,200 $12,000 1,000 10,000 Economies of scale Diseconomies of scale Constant returns to scale LRATC Note! => The “term” economies of scale applies only to long run cost curves

8. Long Run vs. Short Run ATC LRATC is always below or on short run ATC curve –you can be more efficient in long run!

9. Practice Test Page 2

10. Reasons to LOVE Wal-Mart Keeps prices very low Saved consumer 20 billion a year Overall, may save 100 billion per year This Lowers inflation and ↑ GDP Circular Flow PRODUCERS CONSUMERS Factors Products Land, Labor & Capital

11. Reasons to HATE Wal-Mart Keeps wages low Puts local companies out of business Accused of “abusing” worker rights Predatory Pricing?

12. Cost Curves for a Typical Firm Quantity of Output Costs $3.00 2.50 2.00 1.50 1.00 0.50 04268141210 MC ATC AVC AFC MC declines & then increases (diminishing marginal product)

13. Price/ Costs Quantity