Analyzing Costs

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Presentation transcript:

Analyzing Costs

Long Run Total Cost Curve Long run total cost curve: a curve that shows how total cost varies with output, holding input prices fixed, and choosing all inputs to minimize cost.

Figure 8.1. Page 261. Cost minimization and the long run total cost curve for a producer of television sets.

Figure 8.2. Page 262. Long Run Total Cost Curve

How Does The Long Run Total Cost Curve Shift When Input Prices Change? Figure 8.3. Page 263.

Long Run Average Cost Long run average cost: the firm total cost per unit of output. It equals long run total cost divided by total quantity. AC = TC / Q AC = average cost. TC = total cost. Q = output.

Long Run Marginal Cost Long run marginal cost: the rate at which long run total cost changes with respect to change in output. MC = (  TC) / (  Q) MC = marginal cost. TC = total cost. Q = output.

Figure 8.7. Page 267 long run average and marginal cost

Case: The production function Q = 50 (LK) 1/2 w = 25; r = 100; TC = 2Q Long run average cost? Long run marginal cost?

Economies And Diseconomies Of Scale Economies of scale: a characteristic of production in which average cost decreases as output goes up. Diseconomies of scale: a characteristic of production in which average cost increases as output goes up.

Figure Page 271 Economies and Diseconomies.

Short Run Total Cost Curve Figure 8.13 Page 276 Short run total cost curve, total variable cost curve, total fixed cost curve.

Short Run Average Cost SAC = STC / Q SAC = short run average cost. STC = short run total cost. Q = output.

Short Run Marginal Cost SMC = (  STC) / (  Q) SMC = short run marginal cost. STC = short run total cost. Q = output.

Figure Page 279. Short run marginal and average cost curves.

Relationship Between The Long Run And The Short Run Average And Marginal Cost Curves Figure Page 280. The long run average cost curves as an envelope curve. Figure Page 281. The relationship between the long run and short run.

Homework: No. 8.6 Page