2 Economic costbusiness (accounting) costs: only explicit costs (out of pocket)economic costs: explicit cost + implicit cost = opportunity costopportunity costvalue of best alternative use of the resourceclassic example: "There's no such thing as a free lunch"
8 Isocost Lines K , Units of capital per year $150 15 = — — — $ 10 $100 dc$505=———$10b$50 isocost$100 isocost$150 isocosta$50$100$150———=10———=20———=30$5$5$5Source: Perloff, Units of labor per year
9 Cost minimisation Lowest isocost rule Tangency rule K , Units of capital per yearq= 100 isoquantTangency rule3,000-krisocosty3032,000-krisocost1,000-krisocostx100z282450116Source: PerloffL, Units of labor per year
10 Three (equivalent) rules for cost minimisation 1. Lowest Isocost2. Tangency3. Last dollar rule (equimarginal returns)
11 Cobb-Douglas example At X: At Y: K , Units of capital per year 303 y x 100z282450116L, Units of labor per yearAt Y:Source: Perloff
12 Factor price changes K , Units of q = 100 isoquant capital per year Originalisocost,2,000 krNew isocost,1,032 krx100Labour price changes from 24 to 8, slope changes from 24/8 to 8/8.v525077L, Workers per yearSource: Perloff
13 Expansion path K , Units of capital per year 4,000-kr isocost 3,000-kr z200y150x100200 isoquant150 isoquant100 isoquant5075100L, Workers per yearSource: Perloff
14 Long run total cost curve Long-run cost curveC, Cost, kroner4,000Z3,000Y2,000X100150200q, Units per yearSource: Perloff
15 Returns to scale and LAC K, Units ofcapital per yeard8q= 8cd: Decreasing returns to scalec4q= 6b2bc: Constant returns to scalea1q= 3q=1ab: Increasing returns to scaleSource: Perloff1248L, Work hours per year
16 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
17 Long and short run expansion K, Capitalper year4,616 krLong-run expansion path4,000 kr2,000 krz200xyShort-run100expansion path200 isoquant100 isoquant50100159L, Workers per yearSource: Perloff
18 Relationship between LAC and SAC Average cost, $LRACSRAC3SRAC2SRAC1SRAC3b12d10aceqqq, Output per day12Source: Perloff
19 Learning by doingAverage costImprovements in productivity which result from knowledge and experienceEconomies of scaleABLearning by doingCbAC1AC2cAC3qqq123q, Output per periodSource: Perloff
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