1. The Theory of the Firm Economic costs (Explicit, Implicit)
Fixed, variable costs
Total, average, marginal costs

2. Average Costs (AFC/AVC/ATC) Marginal Cost (MC)
TYPES OF COSTS
There are three main types of costs:
Total Costs (TFC/TVC/TC)
Average Costs (AFC/AVC/ATC)
Marginal Cost (MC)

3. Total, Average and Marginal Costs Per Week Case Study: Cost of a machine per week $100 (4 machines) Cost of a worker is $200 per week. Outcome is below:

4. Read Tragakes p. 144-146 & answer these Qs
Define:
costs of production, explicit costs, implicit costs, economic costs, fixed costs, variable costs, total costs, marginal costs, average costs
Also…
Know short run v. long run w/fixed & variable
Give examples of fixed & variable costs
Write down equations

5. The Relationship between ATC, AVC, and MC Curves
The MC curve cuts the AVC & the ATC curves at their lowest points.
Why does gap between ATC and AVC get smaller?
B/c AFC falls as output increases

6. Make sure when you draw the MC, that it intersects the ATC and the AVC at their lowest points!

7. Let’s work on the “costs – Short term” practice activity
PRACTICE Time!
Let’s work on the “costs – Short term” practice activity

8. https://www.youtube.com/watch?v=qYKJdooEnwU - 3.5 MINS
Mr. Clifford on “Cost Curves”
MINS

9. Production & costs in the long run
And now…
Production & costs in the long run

10. How many fixed inputs exist in the long run?

11. Example of decreasing returns to scale:
THE LONG RUN
Looks at when all factors of inputs are increased
Decreasing returns to scale
Example of decreasing returns to scale:
Increasing inputs by 25%, would increase the actual output by less than 25% (e.g. 20%)

12. BUT… BOTH LOOK AT PRODUCTION: OUTPUTS V. INPUTS (NOT COSTS!)
Do NOT confuse!
DIMINISHING MAGINAL RETURNS
Occur only in short run
Shows what happens to output as a variable input is added to a fixed input
Firms must plan for future, otherwise will face diminishing returns
DECREASING RETURNS TO SCALE
Occur only in long run
Shows what happens to output when all inputs are variable
BUT… BOTH LOOK AT PRODUCTION:
OUTPUTS V. INPUTS (NOT COSTS!)

14. Analysis Movement from Q1 to Q2 (Good idea?)
The Long Run Average Cost Curve (LRAC)
In theory the long-run average cost curve (LRAC) is an “envelope” curve”. It envelops an infinite number of short run-average cost curves (SRAC).
Analysis
Movement from Q1 to Q2 (Good idea?)
Where best to Q2?
Movement from SRATC1 to SRAC2 (Good idea?)
Can points be same on SRATC as LRATC?
In theory, are there unlimited SRATCs?
FYI: Cannot produce cheaper than LRATC (unattainable)

15. How much does the law of diminishing returns affect the shape of the LRATC curve?

16. REMINDER Where on the graph is this true?
a % increase in all factors of production will lead to smaller % increase in output, increasing long run average costs

18. What Are…? ECONOMIES OF SCALE DISECONOMIES OF SCALE
Decreases in avg costs of production over long run as a firm increases all its inputs
FYI: Related but different
increasing returns to scale – focuses on production
diseconomies of scale – focuses on costs
DISECONOMIES OF SCALE
Increases in avg costs of production over long run as a firm increases all its inputs
FYI: Related but different
decreasing returns to scale – focuses on production
diseconomies of scale – focuses on costs

19. What Causes…? ECONOMIES OF SCALE DISECONOMIES OF SCALE Specialisation
Of labour
Of management
Efficiency
Of capital equipment
Marketing
Indivisibilities
Of efficient processes
DISECONOMIES OF SCALE
Coordination and monitoring difficulties
Communication difficulties
(Extra: Poor worker motivation)

20. Quiz yourself… What is the difference between
(1) diminishing marginal returns
(2) diseconomies of scale, and
(3) decreasing returns to scale?
What is the difference between
(1) diminishing marginal returns
Short run production
(2) diseconomies of scale
Long run avg costs
OUTPUT V. COSTS (AS INPUTS INCREASE)
(3) decreasing returns to scale?
Long run avg production
INPUT V. OUTPUT

21. (1) START STUDYING FOR TEST & (2) STUDY REVENUE
For next class…
(1) START STUDYING FOR TEST & (2) STUDY REVENUE