# Costs Perloff Chapter 7.

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Costs Perloff Chapter 7

Economic cost business (accounting) costs: only explicit costs (out of pocket) economic costs: explicit cost + implicit cost = opportunity cost opportunity cost value of best alternative use of the resource classic example: "There's no such thing as a free lunch"

Short-run costs Source: Perloff

Short-run cost curves Source: Perloff Cost, \$ 400 C VC 27 A 1 216 20 1
B 120 48 F 2 4 6 8 10 Quantity, q , Units per day 60 MC a AC 28 27 AVC b 20 8 AFC 2 4 6 8 10 Quantity, q , Units per day Source: Perloff

Total product curve and VC
Quantity, q , Total product of labor, Units per day Variable cost 13 10 6 5 1 5 20 24 46 77 25 100 120 230 385 L , Hours of labor per day VC = wL , Variable cost, \$ Source: Perloff

Shape of MC and AC curve

The long-run: input choice
Source: Perloff

Isocost Lines K , Units of capital per year \$150 15 = — — — \$ 10 \$100
d c \$50 5 = \$10 b \$ 50 isocost \$100 isocost \$150 isocost a \$50 \$100 \$150 = 10 = 20 = 30 \$ 5 \$ 5 \$ 5 Source: Perloff , Units of labor per year

Cost minimisation Lowest isocost rule Tangency rule K , Units of
capital per year q = 100 isoquant Tangency rule 3,000-kr isocost y 303 2,000-kr isocost 1,000-kr isocost x 100 z 28 24 50 116 Source: Perloff L , Units of labor per year

Three (equivalent) rules for cost minimisation
1. Lowest Isocost 2. Tangency 3. Last dollar rule (equimarginal returns)

Cobb-Douglas example At X: At Y: K , Units of capital per year 303 y x
100 z 28 24 50 116 L , Units of labor per year At Y: Source: Perloff

Factor price changes K , Units of q = 100 isoquant capital per year
Original isocost, 2,000 kr New isocost, 1,032 kr x 100 Labour price changes from 24 to 8, slope changes from 24/8 to 8/8. v 52 50 77 L , Workers per year Source: Perloff

Expansion path K , Units of capital per year 4,000-kr isocost 3,000-kr
z 200 y 150 x 100 200 isoquant 150 isoquant 100 isoquant 50 75 100 L , Workers per year Source: Perloff

Long run total cost curve
Long-run cost curve C , Cost, kroner 4,000 Z 3,000 Y 2,000 X 100 150 200 q , Units per year Source: Perloff

Returns to scale and LAC
K , Units of capital per year d 8 q = 8 c d : Decreasing returns to scale c 4 q = 6 b 2 b c : Constant returns to scale a 1 q = 3 q = 1 a b : Increasing returns to scale Source: Perloff 1 2 4 8 L , Work hours per year

Returns to scale and LAC (cont)
Returns to scale in the PF are only part of the story. A firm could have a downward sloping LAC curve even with CRTS if the factor ratio changes as output changes. Source: Perloff

Long and short run expansion
K , Capital per year 4,616 kr Long-run expansion path 4,000 kr 2,000 kr z 200 x y Short-run 100 expansion path 200 isoquant 100 isoquant 50 100 159 L , Workers per year Source: Perloff

Relationship between LAC and SAC
Average cost, \$ LRAC SRAC 3 SRAC 2 SRAC 1 SRAC 3 b 12 d 10 a c e q q q , Output per day 1 2 Source: Perloff

Learning by doing Average cost Improvements in productivity which result from knowledge and experience Economies of scale A B Learning by doing C b AC 1 AC 2 c AC 3 q q q 1 2 3 q , Output per period Source: Perloff

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