mbf ge econ ppt ch10
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Businesses and the Costs of Production10McGraw-Hill/IrwinCopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Economic CostsThe payment that must be made to obtain and retain the services of a resourceExplicit CostsMonetary paymentsImplicit CostsValue of next best useSelf-owned resourcesIncludes normal profitLO1
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Accounting Profit and Normal ProfitAccounting profit = Revenue Explicit CostsEconomic profit = Accounting Profit Implicit CostsEconomic profit (to summarize)=Total Revenue Economic Costs=Total Revenue Explicit Costs Implicit Costs
LO1
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Economic ProfitLO1ExplicitcostsAccounting costs (explicit costs only)Implicit costs (including a normal profit)EconomicprofitAccounting profitEconomic(Opportunity)CostsTotal Revenue
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Short Run and Long RunShort RunSome variable inputsFixed plantLong RunAll inputs are variableVariable plantFirms enter and exitLO1
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Short-Run Production RelationshipsTotal Product (TP)Marginal Product (MP)
Average Product (AP) LO2
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The Law of Diminishing ReturnsLO2TPMPAPIncreasingMarginalReturnsDiminishingMarginalReturnsNegativeMarginalReturns1234567890102030Total Product, TP1234567892010Marginal Product, MP
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Short-Run Production CostsFixed Costs (TFC)Costs do not vary with outputVariable Costs (TVC)Costs vary with outputTotal Costs (TC)Sum of TFC and TVCTC = TFC + TVCLO3
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Short-Run Production CostsLO3TFCTCTVCTotalCostVariableCostFixedCost
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Per-Unit, or Average, CostsAverage Fixed CostsAFC = TFC/QAverage Variable CostsAVC = TVC/QAverage Total CostsATC = TC/QMarginal CostsMC = TC/Q
LO3
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Per-Unit, or Average, CostsLO3AFCATCAVCAVCAFC
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Marginal CostLO3AFCMCATCAVCAVCAFC
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MC and Marginal ProductLO3MPAPMCAVCQuantity of OutputQuantity of Labor Production CurvesCost Curves
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Long-Run Production CostsThe firm can change all input amounts, including plant size. All costs are variable in the long run.Long run ATCDifferent short run ATCs
LO4
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The Long-Run Cost Curve LO4Long-RunATCAverage Total CostsATC-1ATC-2ATC-3ATC-4ATC-5Output
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Economies and Diseconomies of ScaleEconomies of scaleLabor specializationManagerial specializationEfficient capitalOther factorsConstant returns to scaleLO4
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Economies and Diseconomies of ScaleDiseconomies of scaleControl and coordination problemsCommunication problemsWorker alienationShirkingLO4
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MES and Industry StructureMinimum Efficient Scale (MES):Lowest level of output where long- run average costs are minimizedCan determine the structure of the industryLO4
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MES and Industry StructureLO4OutputAverage Total CostsLong-RunATCEconomiesOf ScaleConstant ReturnsTo ScaleDiseconomiesOf Scaleq1q2
- Dont Cry Over Sunk CostsSunk costs Costs have already been incurred and thus are irrecoverableRule: Do not engage in any activity where MB
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