1. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3Production and Cost  Understand how marginal product varies as a firm hires more labor in the short run.  Explain the shape of the firm’s marginal cost curve and identify what part of that is the firm’s supply curve.  Distinguish between economies of scale and diseconomies of scale in the long run. Objectives

2. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3Production and Cost  short run  long run  total product  marginal product  law of diminishing returns  fixed cost  variable cost  total cost  marginal cost  marginal revenue  economies of scale  long-run average curve cost Key Terms

3. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 3 Production in the Short Run Fixed and variable resources Increasing returns Law of diminishing returns Marginal product curve

4. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 4 Marginal Product of Labor Figure 5.8

5. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 5 Costs in the Short Run Fixed and variable costs Total cost Marginal cost Marginal cost curve Marginal revenue Short-run losses and shutting down The firm’s supply curve

6. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 6 Marginal Cost Curve for Hercules At Your Service Figure 5.10

7. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 7 Supply Curve for Hercules At Your Service Figure 5.11

8. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 8 Production and Costs in the Long Run Economies of scale Diseconomies of scale Long-run average cost curve

9. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 9 Economies of Scale Economies of scale—forces that reduce a firm’s average cost as the firm’s size, or scale, increases in the long run

10. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 10 Diseconomies of Scale If the firm’s long-run average cost increases as production increases, this reflects diseconomies of scale.

11. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 11 Long-Run Average Cost Curve Long-run average cost curve shows the lowest average cost of producing each level of output.

12. CONTEMPORARY ECONOMICS© Thomson South-Western 5.3 Production and Cost SLIDE 12 A Firm’s Long-Run Average Cost Curve Figure 15.3