Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
9
C HAPTE R
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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9-1
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The Costs of Production
Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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ECONOMIC COSTS
Economic Costs or
Opportunity Costs
Forgoing the
opportunity to produce
alternative goods and
services
Explicit Costs
Implicit Costs
Copyright McGraw-Hill/Irwin, 2005
ECONOMIC COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Normal Profits
• Treated as a cost
• Required to attract &
retain resources
Economic or Pure Profits
Key Terms
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Economic
Profit
End
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9-3
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Total
Revenue
Economic Cost
ECONOMIC COSTS
Profits to an
Economist
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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Economic (opportunity) Costs
Short-Run Production
Costs
Economic
Profit
Implicit costs
(including a
normal profit)
Explicit
Costs
Copyright McGraw-Hill/Irwin, 2005
Profits to an
Accountant
T
O
T
A
L
R
E
V
E
N
U
E
Accounting
Profit
Accounting
costs (explicit
costs only)
SHORT RUN AND LONG RUN
Accounting:
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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Short and long run is based
upon annual chronology.
Economics:
Short run has fixed plant
capacity size.
Long run has variable plant
capacity size.
Copyright McGraw-Hill/Irwin, 2005
SHORT-RUN PRODUCTION
RELATIONSHIPS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Total Product (TP)
Marginal Product (MP)
Productivity and Cost
Curves
Long-Run Production
Costs
Change in Total Product
Marginal Product =
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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Average Product (AP)
Average Product =
End
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9-6
Change in Labor Input
Copyright McGraw-Hill/Irwin, 2005
Total Product
Units of Labor
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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Total Product, TP
Short-Run and Long-Run
Average Product, AP, and
Marginal Product, MP
Economic Costs
SHORT-RUN PRODUCTION
RELATIONSHIPS
Law of Diminishing Returns
Total Product
Quantity of Labor
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
Increasing
Marginal
Returns
Average
Product
Marginal
Product
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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End
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Total Product, TP
Short-Run and Long-Run
Average Product, AP, and
Marginal Product, MP
Economic Costs
SHORT-RUN PRODUCTION
RELATIONSHIPS
Law of Diminishing Returns
Total Product
Quantity of Labor
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
Diminishing
Marginal
Returns
Average
Product
Marginal
Product
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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End
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9-9
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Total Product, TP
Short-Run and Long-Run
Average Product, AP, and
Marginal Product, MP
Economic Costs
SHORT-RUN PRODUCTION
RELATIONSHIPS
Law of Diminishing Returns
Total Product
Quantity of Labor
Quantity of Labor
Copyright McGraw-Hill/Irwin, 2005
Negative
Marginal
Returns
Average
Product
Marginal
Product
SHORT-RUN PRODUCTION COSTS
Fixed Costs
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Total Fixed Costs
Average Fixed Costs =
Total Fixed Costs
Quantity
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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Variable Costs
Total Variable Costs
Average Variable Costs =
Copyright McGraw-Hill/Irwin, 2005
Total Variable Costs
Quantity
SHORT-RUN PRODUCTION COSTS
Total Cost
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Total Fixed and Variable Costs
Average Total Cost =
Total Costs
Quantity
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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Marginal Cost
Total Variable Costs
Marginal Cost =
Copyright McGraw-Hill/Irwin, 2005
Change in Total Costs
Change in Quantity
SHORT-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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Summary of Definitions
Total Fixed Costs =
Total Variable Costs =
Total Costs =
Average Fixed Costs =
Average Variable Costs =
Average Total Costs =
Marginal Cost =
Copyright McGraw-Hill/Irwin, 2005
TFC
TVC
TC
AFC
AVC
ATC
MC
SHORT-RUN COSTS GRAPHICALLY
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Costs (dollars)
Short-Run Production
Costs
Combining TVC
With TFC to get
Total Cost
Key Terms
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Total
Cost
TC
TVC
Fixed Cost
Variable Cost
TFC
Quantity
Copyright McGraw-Hill/Irwin, 2005
SHORT-RUN COSTS GRAPHICALLY
MC
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Costs (dollars)
Short-Run Production
Costs
Plotting Average and
Marginal Costs
ATC
AVC
Key Terms
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End
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9 - 14
AFC
Next
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Quantity
Copyright McGraw-Hill/Irwin, 2005
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Average Product and
Marginal Product
PRODUCTIVITY AND COST CURVES
Long-Run Production
Costs
Minimum Efficient Scale
and Industry Structure
Key Terms
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Quantity of labor
Costs (dollars)
Economies and
Diseconomies of Scale
AP
MP
MC
AVC
Quantity of output
Copyright McGraw-Hill/Irwin, 2005
LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
For every plant capacity
size...
there is a short-run ATC
curve.
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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All such plant capacities
can be plotted.
Copyright McGraw-Hill/Irwin, 2005
LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Unit Costs
Short-Run Production
Relationships
Minimum Efficient Scale
and Industry Structure
Key Terms
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End
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9 - 17
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Output
Copyright McGraw-Hill/Irwin, 2005
LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Unit Costs
Short-Run Production
Relationships
Minimum Efficient Scale
and Industry Structure
Key Terms
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End
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9 - 18
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Output
Copyright McGraw-Hill/Irwin, 2005
LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Unit Costs
Short-Run Production
Relationships
The long-run ATC just “envelopes”
all of the short-run ATC curves.
Minimum Efficient Scale
and Industry Structure
Key Terms
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End
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Output
Copyright McGraw-Hill/Irwin, 2005
LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Unit Costs
Short-Run Production
Relationships
Minimum Efficient Scale
and Industry Structure
long-run ATC
Key Terms
Previous
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End
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9 - 20
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Output
Copyright McGraw-Hill/Irwin, 2005
ECONOMIES AND
DISECONOMIES OF SCALE
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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• Labor Specialization
• Managerial
Specialization
• Efficient Capital
• Other Factors
Diseconomies of Scale
Constant Returns to Scale
graphically presented...
Copyright McGraw-Hill/Irwin, 2005
ECONOMIES AND
DISECONOMIES OF SCALE
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Economies
of scale
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Unit Costs
Short-Run Production
Costs
Key Terms
long-run ATC
Previous
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End
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9 - 22
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Output
Copyright McGraw-Hill/Irwin, 2005
ECONOMIES AND
DISECONOMIES OF SCALE
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Economies
of scale
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Constant returns
to scale
Unit Costs
Short-Run Production
Costs
Key Terms
long-run ATC
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End
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Output
Copyright McGraw-Hill/Irwin, 2005
ECONOMIES AND
DISECONOMIES OF SCALE
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Economies
of scale
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Constant returns
to scale
Diseconomies
of scale
Unit Costs
Short-Run Production
Costs
Key Terms
long-run ATC
Previous
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End
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9 - 24
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Output
Copyright McGraw-Hill/Irwin, 2005
ECONOMIES AND
DISECONOMIES OF SCALE
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Unit Costs
Short-Run Production
Costs
Where extensive
economies of
scale exist
Key Terms
long-run ATC
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End
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Output
Copyright McGraw-Hill/Irwin, 2005
ECONOMIES AND
DISECONOMIES OF SCALE
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Unit Costs
Short-Run Production
Costs
Where economies
of scale are
quickly exhausted
Key Terms
long-run ATC
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Output
Copyright McGraw-Hill/Irwin, 2005
MINIMUM EFFICIENT SCALE
AND INDUSTRY STRUCTURE
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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Minimum Efficient Scale -
MES
Natural Monopoly
Applications & Illustrations
•Rising Cost of Insurance and
Security
•Successful Start-Up Firms
•The Verson Stamping Machine
•The Daily Newspaper
•Aircraft and Concrete Plants
Copyright McGraw-Hill/Irwin, 2005
economic (opportunity) cost
explicit costs
implicit costs
normal profit
economic profit
short run
long run
total product (TP)
marginal product (MP)
average product (AP)
law of diminishing returns
fixed costs
Copyright McGraw-Hill/Irwin, 2005
variable costs
total cost
average fixed cost (AFC)
average variable cost
(AVC)
average total cost (ATC)
marginal cost (MC)
economies of scale
diseconomies of scale
constant returns to scale
minimum efficient scale
natural monopoly
BACK
END
NEXT:
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Pure Competition
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
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End
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Chapter 10
Copyright McGraw-Hill/Irwin, 2005