production costs in the short run for a firm production costs are the mirror image of productivity
TRANSCRIPT
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Production Costs
In the short run for a firm
Production Costs
Are The mirror image
Of productivity
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AC
MC
MP
AP
Marginal and Average Physical Product per unit of input
Marginal and Average Cost per unit of output
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Economic cost
• Includes explicit costs
and Also
• includes implicit costs
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explicit costs
Accounting costs •Out of pocket expenses -
•When you pay someone else for one of the factors of production
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implicit costs
– Value of the business owner’s time
– Other opportunity costs– The cost of capital tied up in a
productive activity
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Economic costs
• explicit costs
• implicit costs (opportunity costs)
•A “normal profit” covers all of the above
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Economic costs and Economic Profit
• Economic Costs – Include explicit costs
• Accounting costs– Out of pocket expenses
– Also include implicit costs• Value of the business owner’s time
– Wages forgone
• The cost of capital tied up in a productive activity– Rent forgone
– A “normal profit” covers all of the above– ECONOMIC PROFIT:
• returns are greater than normal profit
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Short run
• In the short run
• some costs are fixed, at least one– The plant capacity– owner’s overhead
• And some are variable– Additional inputs to increase productivity– Usually labor
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Total costs
total variable costs TVC
+ total fixed costs TFC
=TC
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Average costs
Average costs are
costs per unit of output
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Average costs
Average variable costs
AVC = TVC
TQ (output)
Average fixed costs
AFC = TFC
TQ (output)
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Average Total costs
• ATC = average variable costs (AVC) + average fixed costs +(AFC)
=ATC• Or • ATC = TC
output
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ATC In the short run
• Is U-shaped
• Because declining AFC (avg. fixed costs) bring costs down at low production levels.
• At higher production levels, sharply rising AVC (average variable costs) swamp the effect of declining AFC (average fixed costs)
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MARGINAL COST
MC is the extra cost of producing an additional unit
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MC rises as production expands
• Either– immediately
• Or– At low levels of output if diminishing returns
set in with some delay
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Marginal cost and average costcurves
• When Marginal Costs are below average Costs (MC<AvgC)– Average costs are declining
• When Marginal Costs are above average Costs (MC>AvgC)– Average costs are rising
• When Marginal Costs are equal to average Costs (MC=avgC)
• Average costs are constant, at the minimum
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MC
AC
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The marginal cost curve crosses
The Average Variable Cost curve
and
the Average Total Cost curve
At their
Minimum points
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Economic Efficiency MB=MCand perfect competition
• Allocative efficiency (P=MC)
• (short run)– Can achieve economic profit– down to (P=MC=AVC) you shut down – If AVC>MC loss is greater than fixed cost
• Productive efficiency (P=minimum ATC)
• (long run)– Achieves no economic profit (P=ATC=MC)
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For the exam
• RELATIONSHIPS
– TOTAL, AVERAGE, AND MARGINAL PRODUCT
– TOTAL, VARIABLE, FIXED AND MARGINAL COST
– TOTAL REVENUE AND MARGINAL REVENUE
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Total product curve
• 1st total product rises/unit of input– Marginal product is greater than average product – (if MP>Avg P, then Avg P is rising)
• 2nd total product increases at a decreasing rate/unit of input– Marginal product is less than average product– (if MP<AvgP, then AvgP is decreasing)
• 3rd – total product declines/unit of input– Marginal product is negative
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THE PURELY COMPETITIVE FIRM
• SIDE BY SIDE GRAPHS FOR PURE COMPETITION (PRICE TAKER)
• For the firm P=MR=AR=D• If all of the above meet marginal cost (MC)
– the firm is earning an economic profit (MR>ATC)– the firm is earning an no economic profit (MR=ATC)– the firm can operate at a loss (MR<ATC)– until AVC>MC (shutdown point)
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Assume that in the short run at the profit-maximizing output, the price is lower than average variable cost. The perfectly competitive firm should
• (A) increase its price
• (B) decrease its price
• (C) increase its output
• (D) decrease its output
• (E) shut down