Presentation is loading. Please wait.

Presentation is loading. Please wait.

Costs Perloff Chapter 7. Economic cost business (accounting) costs: only explicit costs (out of pocket) economic costs: explicit cost + implicit cost.

Similar presentations


Presentation on theme: "Costs Perloff Chapter 7. Economic cost business (accounting) costs: only explicit costs (out of pocket) economic costs: explicit cost + implicit cost."— Presentation transcript:

1 Costs Perloff Chapter 7

2 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"

3 Short-run costs Source: Perloff

4 Short-run cost curves 120 216 400 48 0610 428 Quantity,q, Units per day Quantity,q, Units per day 6 b a B A 428 C F 1 1 27 20 VC MC AC AVC AFC Cost, $ 60 28 27 20 8 0 Source: Perloff

5 Total product curve and VC Quantity,q, Units per day 24 120 46 230 20 100 5 25 77 385 Total product of labor, Variable cost L, Hours of labor per day VC =wL, Variable cost, $ 0 5 1 6 10 13 Source: Perloff

6 Shape of MC and AC curve

7 The long-run: input choice Source: Perloff

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

9 Cost minimisation K, Units of capital per year y x z 11650240 L, Units of labor per year 100 303 28 q = 100 isoquant 3,000-kr isocost 2,000-kr isocost 1,000-kr isocost Lowest isocost rule Tangency rule Source: Perloff

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

11 Cobb-Douglas example K, Units of capital per year y x z 11650240 L, Units of labor per year 100 303 28 At X: At Y: Source: Perloff

12 Factor price changes K, Units of capital per year v x 77500L, Workers per year 100 52 q = 100 isoquant Original isocost, 2,000 kr New isocost, 1,032 kr Source: Perloff

13 Expansion path K, Units of capital per year x y z 10075500L, Workers per year 150 200 100 Expansion path 3,000-kr isocost 2,000-kr isocost 4,000-kr isocost 100 isoquant 150 isoquant 200 isoquant Source: Perloff

14 Long run total cost curve C, Cost, kroner X Y Z 0q, Units per year 4,000 3,000 2,000 Long-run cost curve 200100150 Source: Perloff

15 Returns to scale and LAC K, Units of capital per year 412 a b c a b: Increasing returns to scale b c: Constant returns to scale c d: Decreasing returns to scale 8L, Work hours per year 4 2 1 0 8 q = 8 q = 6 q = 3 q =1 d Source: Perloff

16 Returns to scale and LAC (cont) Source: Perloff

17 Long and short run expansion K, Capital per year 100 x y z 50159 Long-run expansion path 200 isoquant 100 isoquant Short-run expansion path 4,616 kr 4,000 kr 2,000 kr L, Workers per year0 100 200 Source: Perloff

18 Relationship between LAC and SAC Average cost, $ a b d e SRAC 1 2 3 3 LRAC c q 2 q 1 q, Output per day 10 0 12 Source: Perloff

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


Download ppt "Costs Perloff Chapter 7. Economic cost business (accounting) costs: only explicit costs (out of pocket) economic costs: explicit cost + implicit cost."

Similar presentations


Ads by Google