Microeconomics Ch 21

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    M i c r o e c o n o m i c

    s

    Dr. Karim Kobeissi

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    WHAT ARE COSTS?

    According to the Law of Supply: Fir! are willing to produce and !ell a

    greater "uantity of a good when the

    price of the good i! high#Thi! re!ult! in a !upply cur$e that !lope!

    upward#

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    Total Re$enue% Total Co!t% and &ro't

    Total RevenueThe aount a 'r recei$e! for the sale

    of its output.

    Total CostThe market value of the inputs a 'r

    u!e! in production#

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    Total Re$enue% Total Co!t% and &ro't

    Profti! the 'r(! total re$enueinu! it! total co!t#

    &ro't ) Total re$enue * Total co!t

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    Co!t! a! Opportunity Co!t!

    A 'r(! co!t of production include! allthe opportunity co!t! of a+ing it!output of good! and !er$ice!#

    E,plicit and -plicit Co!t! A 'r(! co!t of production include explicit

    costsand implicit costs.

    E,plicit co!t! are input co!t! that re"uire adirect e,penditure of oney .y the 'r#

    -plicit co!t! are input co!t! that do not re"uirean e,penditure of oney .y the 'r#

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    Econoic &ro't $er!u! Accounting

    &ro't

    Econoi!t! ea!ure a 'r(! economicprofta! total re$enue inu! total co!t%including .oth e,plicit and iplicit co!t!#

    Accountant! ea!ure the accountingproft a! the 'r(! total re$enue inu!only the 'r(! e,plicit co!t!#

    Econoic pro't i! !aller thanaccounting pro't#

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    Econoic &ro't $er!u! Accounting &ro't

    When total re$enue e,ceed! .oth

    e,plicit and iplicit co!t!% the 'r

    earn! econoic pro't#

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    &RO/0CT-O1 A1/ COSTS

    The &roduction Function

    - The production unction shows therelationship between quantity o inputs

    used to mae a good and the quantity ooutput o that good.

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    The &roduction Function

    2arginal &roduct

    The marginal product o any input in the

    production proce!! is the increase in

    output that ari!e! fro an additional

    unit of that input#

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    The &roduction Function

    !iminishing marginal product i! theproperty where.y the arginal productof an input decline! a! the "uantity of

    the input increa!e!#

    E,aple: A! ore and ore wor+er! are

    hired at a 'r% each additional wor+er

    contri.ute! le!! and le!! to production

    .ecau!e the 'r ha! a liited aount of

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    The &roduction Function

    /iini!hing 2arginal &roduct

    The !lope of the production function

    ea!ure! the arginal product of an

    input% !uch a! a wor+er#

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    The &roduction Function

    /iini!hing 2arginal &roduct

    When the arginal product decline!% the

    production function .ecoe! 3atter#

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    Fro the &roduction Function to the Total*Co!t Cur$e

    The relation!hip .etween the"uantity a 'r can produce and it!co!t! deterine! pricing deci!ion!#

    The total*co!t cur$e !how! thi!relation!hip graphically#

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    THE 4AR-O0S 2EAS0RES OF COST

    Co!t! of production ay .e di$ided

    intofxed costsand variable costs# Fixed costsare tho!e co!t! that do

    not varywith the "uantity of outputproduced#

    Variable costsare tho!e co!t! that dovary with the "uantity of outputproduced#

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    Fi,ed and 4aria.le Co!t!

    Total Co!t!Total Fi,ed Co!t! 5TFC6

    Total 4aria.le Co!t! 5T4C6

    Total Co!t! 5TC6

    TC) T"C7 T#C

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    Fi,ed and 4aria.le Co!t!

    A$erage Co!t!

    A$erage co!t! can .e deterined .y di$iding the

    'r(! co!t! .y the "uantity of output it produce!#

    The a$erage co!t i! the co!t of each typical unit

    of product#

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    Fi,ed and 4aria.le Co!t!

    A$erage Co!t!

    $verage "ixed Costs5AFC6

    $verage #ariable Costs5A4C6

    $verage Total Costs5ATC6

    $TC)$"C7$#C

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    A$erage and 2arginal Co!t!

    2arginal Co!t

    %arginal cost 52C6 ea!ure! the increa!e in total

    co!t that ari!e! fro an e,tra unit of production#

    2arginal co!t help! an!wer the following "ue!tion:

    How uch doe! it co!t to produce an additional unit of

    output?

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    A$erage and 2arginal Co!t

    #

    (change in total cost)

    (change in quantity)

    TC

    MC Q

    = =

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    Co!t Cur$e! and TheirShape!

    2arginal co!t ri!e! with the aount ofoutput produced#

    Thi! re3ect! the property of diini!hing

    arginal product#

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    Co!t Cur$e! and TheirShape!

    The a$erage total*co!t cur$e i! 0*!haped#

    At $ery low le$el! of output a$eragetotal co!t i! high .ecau!e ',ed co!ti! !pread o$er only a few unit!#

    A$erage total co!t decline! a! output

    increa!e!#

    A$erage total co!t !tart! ri!ing.ecau!e a$erage $aria.le co!t ri!e!

    !u.!tantially#

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    Co!t Cur$e! and TheirShape!

    The .otto of the 0*!haped ATC

    cur$e occur! at the "uantity that

    inii8e! a$erage total co!t# Thi!

    "uantity i! !oetie! called the

    e9cient !cale of the 'r#

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    Typical Co!t Cur$e!

    -t i! now tie to e,aine the

    relation!hip! that e,i!t .etween the

    dierent ea!ure! of co!t#

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    Typical Co!t Cur$e!

    Three -portant &ropertie! of Co!t

    Cur$e!

    2arginal co!t e$entually ri!e! with the

    "uantity of output#

    The a$erage*total*co!t cur$e i! 0*!haped#

    The arginal*co!t cur$e cro!!e! the

    a$era e*total*co!t cur$e at the

    COSTS -1 THE SHORT R01 A1/ -1 THE

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    COSTS -1 THE SHORT R01 A1/ -1 THELO1; R01

    For any 'r!% the di$i!ion of total co!t!.etween ',ed and $aria.le co!t! depend!on the tie hori8on .eing con!idered# -n the !hort run% !oe co!t! are ',ed#

    -n the long run% all',ed co!t! .ecoe $aria.le co!t!#

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    Econoie! and /i!econoie! of

    Scale

    &conomies o scale refer to the propertywhere.y long*run a$erage total co!t fall! a!the "uantity of output increa!e!#

    Constant returns to scale refer! to theproperty where.y long*run a$erage totalco!t !tay! the !ae a! the "uantity ofoutput increa!e!#

    !iseconomies o scalerefer to the propertywhere.y long*run a$erage total co!t ri!e!a! the "uantity of output increa!e!#

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