9 - 1 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 Previous Slide Next Slide End Show The Costs of Production 9 C H A P T E R

9 - 2 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 Previous Slide Next Slide End Show ECONOMIC COSTS Economic Costs or Opportunity Costs Forgoing the opportunity to produce alternative goods and services Explicit Costs Implicit Costs

9 - 3 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 Previous Slide Next Slide End Show Treated as a cost Required to attract & retain resources Economic or Pure Profits Economic Profit Total Revenue Economic Cost Normal Profits ECONOMIC COSTS

9 - 4 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 Previous Slide Next Slide End Show Economic Profit Implicit costs (including a normal profit) Explicit Costs Accounting costs (explicit costs only) Accounting Profit Economic (opportunity) Costs TOTALREVENUETOTALREVENUE Profits to an Economist Profits to an Accountant ECONOMIC COSTS

9 - 5 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 Previous Slide Next Slide End Show SHORT RUN AND LONG RUN Accounting: Short and long run is based upon annual chronology. Economics: Short run has fixed plant capacity size. Long run has variable plant capacity size.

9 - 6 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 Previous Slide Next Slide End Show Average Product (AP) Total Product (TP) Marginal Product (MP) SHORT-RUN PRODUCTION RELATIONSHIPS Marginal Product = Change in Total Product Change in Labor Input Average Product = Total Product Units of Labor

9 - 7 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 Previous Slide Next Slide End Show Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Increasing Marginal Returns

9 - 8 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 Previous Slide Next Slide End Show Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Diminishing Marginal Returns

9 - 9 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 Previous Slide Next Slide End Show Law of Diminishing Returns SHORT-RUN PRODUCTION RELATIONSHIPS Total Product, TP Quantity of Labor Average Product, AP, and Marginal Product, MP Quantity of Labor Total Product Marginal Product Average Product Negative Marginal Returns

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 Previous Slide Next Slide End Show Fixed Costs Total Fixed Costs Average Fixed Costs = Total Fixed Costs Quantity Variable Costs Total Variable Costs Average Variable Costs = Total Variable Costs Quantity SHORT-RUN PRODUCTION COSTS

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 Previous Slide Next Slide End Show Total Cost Total Fixed and Variable Costs Average Total Cost = Total Costs Quantity Marginal Cost Total Variable Costs Marginal Cost = Change in Total Costs Change in Quantity SHORT-RUN PRODUCTION COSTS

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 Previous Slide Next Slide End Show Marginal Cost = MC Total Fixed Costs = TFC Total Variable Costs = TVC Average Variable Costs = AVC Total Costs = TC Average Total Costs = ATC Average Fixed Costs = AFC Summary of Definitions SHORT-RUN PRODUCTION COSTS

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 Previous Slide Next Slide End Show SHORT-RUN COSTS GRAPHICALLY Quantity Costs (dollars) TC Total Cost Fixed Cost TVC Variable Cost TFC Combining TVC With TFC to get Total Cost

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 Previous Slide Next Slide End Show SHORT-RUN COSTS GRAPHICALLY Quantity Costs (dollars) AFC AVC ATC MC Plotting Average and Marginal Costs

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 Previous Slide Next Slide End Show PRODUCTIVITY AND COST CURVES Costs (dollars) Average Product and Marginal Product Quantity of labor Quantity of output MP AP MC AVC

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 Previous Slide Next Slide End Show LONG-RUN PRODUCTION COSTS All such plant capacities can be plotted. For every plant capacity size... there is a short-run ATC curve.

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 Previous Slide Next Slide End Show LONG-RUN PRODUCTION COSTS Unit Costs Output

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 Previous Slide Next Slide End Show LONG-RUN PRODUCTION COSTS Unit Costs Output

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 Previous Slide Next Slide End Show LONG-RUN PRODUCTION COSTS The long-run ATC just “envelopes” all of the short-run ATC curves. Unit Costs Output

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 Previous Slide Next Slide End Show LONG-RUN PRODUCTION COSTS Unit Costs Output long-run ATC

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 Previous Slide Next Slide End Show ECONOMIES AND DISECONOMIES OF SCALE Labor Specialization Managerial Specialization Efficient Capital Other Factors Diseconomies of Scale Constant Returns to Scale graphically presented...

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 Previous Slide Next Slide End Show ECONOMIES AND DISECONOMIES OF SCALE Unit Costs Output long-run ATC Economies of scale

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 Previous Slide Next Slide End Show ECONOMIES AND DISECONOMIES OF SCALE Unit Costs Output long-run ATC Economies of scale Constant returns to scale

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 Previous Slide Next Slide End Show ECONOMIES AND DISECONOMIES OF SCALE Unit Costs Output long-run ATC Economies of scale Diseconomies of scale Constant returns to scale

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 Previous Slide Next Slide End Show ECONOMIES AND DISECONOMIES OF SCALE Unit Costs Output long-run ATC Where extensive economies of scale exist

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 Previous Slide Next Slide End Show ECONOMIES AND DISECONOMIES OF SCALE Unit Costs Output long-run ATC Where economies of scale are quickly exhausted

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 Previous Slide Next Slide End Show Natural Monopoly MINIMUM EFFICIENT SCALE AND INDUSTRY STRUCTURE Minimum Efficient Scale - MES Applications & Illustrations Rising Cost of Insurance and Security Successful Start-Up Firms The Verson Stamping Machine The Daily Newspaper Aircraft and Concrete Plants

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 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 ENDBACK Copyright McGraw-Hill/Irwin, 2005

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 Previous Slide Next Slide End Show NEXT: Pure Competition Chapter 10