7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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Chapter 7 ECON4 William A.
McEachern
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+r#!&cti#n
and C#st
in the ,irm
7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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22
C#st an! +r#)it
•
+r#!&cers- Ma(imie pr#)it• Opp#rt&nit" c#st
/ All res#&rces hae an #pp#rt&nit" c#st
• E(plicit c#sts / Opp#rt&nit" c#st #) res#&rces empl#"e!
$" a )irm
/ Cash pa"ments / On the acc#&nting statement
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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C#st an! +r#)it
•
mplicit c#sts / A )irms #pp#rt&nit" c#st #) &sing its #'n
res#&rces #r th#se pr#i!e! $" its
#'ners / With#&t a c#rresp#n!ing cash pa"ment
/ N#t #n the acc#&nting statement
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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Alternatie Meas&res #) +r#)it
•
Acc#&nting pr#)it / 3#tal reen&e min&s e(plicit c#sts
• Ec#n#mic pr#)it
/ 3#tal reen&e min&s all c#sts implicit an!e(plicit• Opp#rt&nit" c#st #) all res#&rces
•N#rmal pr#)it / Acc#&nting pr#)it earne! 'hen all res#&rces
earn their #pp#rt&nit" c#st
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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E(hi$it 1
5
Wheeler 6ealer Acc#&nts% 2012
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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+r#!&cti#n in the h#rt R&n
•
8aria$le res#&rces / Can $e arie! in the sh#rt r&n t#
increase #r !ecrease pr#!&cti#n
•
,i(e! res#&rces / Cann#t $e arie! in the sh#rt r&n
• h#rt r&n
/ At least #ne res#&rce is )i(e!• L#ng r&n
/ N# res#&rce is )i(e!9© 2015 Cengage Learning. All Rights Resere!. Ma" n#t $e c#pie!% scanne!% #r !&plicate!% in 'h#le #r in part% e(cept )#r &se as
permitte! in a license !istri$&te! 'ith a certain pr#!&ct #r serice #r #ther'ise #n a pass'#r!*pr#tecte! 'e$site )#r classr##m &se.
7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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6iminishing Marginal Ret&rns
•
3#tal pr#!&ct / A )irms t#tal #&tp&t
• +r#!&cti#n )&ncti#n
/ Relati#nship $et'een am#&nt #)res#&rces empl#"e! an! t#tal pr#!&ct
• Marginal pr#!&ct
/ Change in t#tal pr#!&ct )r#m ana!!iti#nal &nit #) res#&rce
/ Other things c#nstant
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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6iminishing Marginal Ret&rns
•
ncreasing marginal ret&rns / Marginal pr#!&ct increases
• 6iminishing marginal ret&rns
/ Marginal pr#!&ct !ecreases• La' #) !iminishing marginal ret&rns
/ As m#re #) a aria$le res#&rce is a!!e!
t# a gien am#&nt #) an#ther res#&rce / Marginal pr#!&ct eent&all" !eclines
• C#&l! $ec#me negatie
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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E(hi$it 2
;
3he h#rt*R&n Relati#nship <et'een =nits #) La$#r an!3#ns #) ,&rnit&re M#e!
Marginal pr#!&ct increases as the )irm hires each #) the )irst three '#r>ers% re)lectingincreasing marginal ret&rns. 3hen marginal pr#!&ct !eclines% re)lecting !iminishingmarginal ret&rns. A!!ing m#re '#r>ers ma"% at s#me p#int% act&all" re!&ce t#talpr#!&ct as #cc&rs here 'ith an eighth '#r>er $eca&se '#r>ers start getting in each#thers 'a".
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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E(hi$it
10
3he 3#tal an! Marginal +r#!&ct #) La$#r
5
10
15
3 # t a l p r # ! & c
t
4 t # n s ? ! a " 5
5 10 W#r>ers per !a"0
5 10 W#r>ers per !a"
1
5
M a r g i n a l p r # ! & c t
4 t # n s ? ! a "
5
0
2
4
3#tal pr#!&ct
Marginal pr#!&ct
Negatie
marginal
ret&rns
6iminishing $&t
p#sitie
marginal ret&rns
ncreasing
Marginal
ret&rns
a 3#tal pr#!&ct
$ Marginal pr#!&ct
When marginal pr#!&ctis rising% t#tal pr#!&ctincreases $" increasingam#&nts. Whenmarginal pr#!&ct is)alling $&t still p#sitie%t#tal pr#!&ct increases$" !ecreasing am#&nts.
When marginal pr#!&cte@&als 0% t#tal pr#!&ct isat a ma(im&m. When
marginal pr#!&ct isnegatie% t#tal pr#!&ct is)alling.
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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C#sts in the h#rt R&n
•
,i(e! c#st% ,C / An" pr#!&cti#n c#st that is in!epen!ent
#) the )irms rate #) #&tp&t
•
8aria$le c#st% 8C / An" pr#!&cti#n c#st that changes as the
rate #) #&tp&t changes
•
3#tal c#st% 3C ,C B 8C
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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C#sts in the h#rt R&n
•
Marginal c#st% MC 3C?@ / Change in t#tal c#st res<ing )r#m a #ne*
&nit change in #&tp&t
•
Changes in MC / Re)lect changes in marginal pr#!&ctiit"
• ncreasing marginal ret&rns
/ MC )alls• 6iminishing marginal ret&rns
/ MC increases12© 2015 Cengage Learning. All Rights Resere!. Ma" n#t $e c#pie!% scanne!% #r !&plicate!% in 'h#le #r in part% e(cept )#r &se as
permitte! in a license !istri$&te! 'ith a certain pr#!&ct #r serice #r #ther'ise #n a pass'#r!*pr#tecte! 'e$site )#r classr##m &se.
E hi$it 4
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E(hi$it 4
1
h#rt*R&n 3#tal an! Marginal C#st 6ata )#r m##ther M#er
<eca&se #) increasing marginal ret&rns )r#m the )irst three '#r>ers% marginal c#st!eclines at )irst% as sh#'n in c#l&mn 9. <eca&se #) !iminishing marginal ret&rns$eginning 'ith the )#&rth '#r>er% marginal c#st starts increasing.
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C#sts in the h#rt R&n
•
,i(e! c#st c&re / traight h#ri#ntal line
• 8aria$le c#st c&re
/ tarts at the #rigin• 3#tal c#st c&re
/ ,i(e! c#st c&re B aria$le c#st c&re
• l#pe #) t#tal c#st c&re / Marginal c#st
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E hi$it 5
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E(hi$it 5
15
3#tal an! Marginal C#st C&res )#r m##ther M#er
200
D500
3 # t a l !
# l l a r s
25
C # s t p e r t #
n
D50 Marginal c#st
; 15 3#ns per !a"0 9 12
,i(e! c#st
3#tal c#st
3#ns per !a"0 ; 159 12
8aria$le c#st,i(e!
c#st
n panel a% )i(e! c#st is D200at all leels #) #&tp&t. 8aria$lec#st starts )r#m the #rigin an!increases sl#'l" at )irst as#&tp&t increases. When thearia$le res#&rce generates!iminishing marginal ret&rns%
aria$le c#st $egins t#increase m#re rapi!l". 3#talc#st is the ertical s&m #) )i(e!c#st an! aria$le c#st. n panel$% marginal c#st )irst !eclines%re)lecting increasing marginal
ret&rns )r#m the aria$leres#&rce la$#r in thise(ample an! then increases%re)lecting !iminishing marginalret&rns.
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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Aerage C#st in the h#rt R&n
•
Aerage aria$le c#st% A8C 8C?@ / 8aria$le c#st !ii!e! $" #&tp&t
• Aerage )i(e! c#st% A,C ,C?@
/ ,i(e! c#st !ii!e! $" @&antit"• Aerage t#tal c#st% A3C 3C?@
/ 3#tal c#st !ii!e! $" #&tp&t
/ A3C A,C B A8C
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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Aerage C#st in the h#rt R&n
•
When MC aerage c#st / 3he marginal p&lls !#'n the aerage
• When MC F aerage c#st
/ 3he marginal p&lls &p the aerage• =*shape #) aerage c#st c&res
/ La' #) !iminishing marginal ret&rns
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E hi$it 9
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E(hi$it 9
1:
h#rt*R&n 3#tal% Marginal% an! Aerage C#st6ata )#r m##ther M#er
Marginal c#st )irst )alls then increases $eca&se #) increasing then !iminishing marginalret&rns )r#m la$#r. As l#ng as marginal c#st is $el#' aerage c#st% aerage c#st!eclines. Once marginal c#st e(cee!s aerage c#st% aerage c#st increases. C#l&mns4% 5% an! 9 sh#' the relati#n $et'een marginal an! aerage c#sts.
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E(hi$it 7
1;
Aerage an! Marginal C#st C&res )#r m##ther M#er
0 5 10 15 3#ns per !a"
D150
125
100
75
50
25
C # s t p e r t # n
A3C
A8C
MC
Aerage aria$le c#st an!aerage t#tal c#st c&res )irst!ecline% reach l#' p#ints% an!then rise. Oerall% the" hae =shapes. When marginal c#stis $el#' aerage aria$le
c#st% aerage aria$le c#st is)alling. When marginal c#ste@&als aerage aria$le c#st%aerage aria$le c#st is at itsminim&m. When marginal c#stis a$#e aerage aria$le
c#st% aerage aria$le c#st isincreasing. 3he samerelati#nship h#l!s $et'eenmarginal c#st an! aeraget#tal c#st.
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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C#sts in the L#ng R&n
•
L#ng r&n / +lanning h#ri#n
/ All res#&rces can $e arie!
•,irms plan )#r the l#ng r&n
• ,irms pr#!&ce in the sh#rt r&n
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C#sts in the L#ng R&n
•
Ec#n#mies #) scale / ,#rces that re!&ce a )irms aerage c#st
/ As the scale #) #perati#n increases in the
l#ng r&n• 6isec#n#mies #) scale
/ ,#rces that ma" eent&all" increase a
)irms aerage c#st / As the scale #) #perati#n increases in the
l#ng r&n
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C#sts in the L#ng R&n
•
L#ng*r&n aerage c#st c&re / n!icates the l#'est aerage c#st #)pr#!&cti#n•
At each rate #) #&tp&t 'hen the scale #) the)irm aries
/ +lanning c&re
/ =*shape!• Ec#n#mies #) scale
• 6isec#n#mies #) scale
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E(hi$it :
7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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E(hi$it :
2
h#rt*R&n Aerage 3#tal C#st C&res ,#rm the L#ng*R&n Aerage C#st C&re% #r +lanning C&re
C # s t p e r & n i t
0 @ @a @ O&tp&t per peri#!@$
M M
L
L
C&res % MM% an! LL sh#' sh#rt*r&n aerage t#tal c#sts )#r small% me!i&m% an! largeplants% respectiel". ,#r #&tp&t less than @a% aerage c#st is l#'est 'hen the plant is small.
<et'een @a an! @$% aerage c#st is l#'est 'ith a me!i&m*sie plant. ) #&tp&t e(cee!s @$%
the large plant #))ers the l#'est aerage c#st. 3he l#ng*r&n aerage*c#st c&re c#nnects
these l#' c#st segments #) each c&re an! is i!enti)ie! as a$L.
a b
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E(hi$it ;
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E(hi$it ;
24
Man" h#rt*R&n Aerage 3#tal C#st C&res ,#rm a ,irms
L#ng*R&n Aerage C#st C&re% #r +lanning C&re
A3C1
A3C2
0 @ @ O&tp&t per peri#!
C # s t p e r
& n i t
D11
10
;
b
A3C
A3C4
A3C5
A3C9
A3C7
A3C:
A3C;
A3C10
L#ng*r&n
aerage c#st
c
a
With man" p#ssi$le plant sies% the l#ng*r&n aerage c#st c&re is the enel#pe #) p#rti#ns #) thesh#rt*r&n aerage c#st c&res. Each sh#rt*r&n c&re is tangent t# the l#ng*r&n aerage c#stc&re. Each p#int #) tangenc" represents the least*c#st 'a" #) pr#!&cing that rate #) #&tp&t.
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7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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C#sts in the L#ng R&n
•
C#nstant l#ng*r&n aerage c#st / Oer s#me range #) #&tp&t
/ L#ng*r&n aerage c#st neither increases
n#r !ecreases 'ith changes in )irm sie / N# ec#n#mies #) scale
/ N# !isec#n#mies #) scale
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E(hi$it 10
7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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E(hi$it 10
29
A ,irms L#ng*R&n Aerage C#st C&re
C # s t p e r & n i t
0 A O&tp&t per peri#!<
Ec#n#mies
#) scale
L#ng*r&n
aerage c#st
6isec#n#mies
#) scale
C#nstant
aerage c#st
=p t# #&tp&t leel A% l#ng*r&n aerage c#st )alls as the )irm e(periences ec#n#mies #) scale.O&tp&t leel A is the minim&m e))icient scaleGthe l#'est rate #) #&tp&t at 'hich the )irmta>es )&ll a!antage #) ec#n#mies #) scale. <et'een A an! <% the aerage c#st is c#nstant.<e"#n! #&tp&t leel <% l#ng*r&n aerage c#st increases as the )irm e(periences
!isec#n#mies #) scale.© 2015 Cengage Learning. All Rights Resere!. Ma" n#t $e c#pie!% scanne!% #r !&plicate!% in 'h#le #r in part% e(cept )#r &se aspermitte! in a license !istri$&te! 'ith a certain pr#!&ct #r serice #r #ther'ise #n a pass'#r!*pr#tecte! 'e$site )#r classr##m &se.
7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)
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Ec#n#mies H 6isec#n#mies #) cale
•
+lant leel / +artic&lar l#cati#n
• ,irm leel
/ C#llecti#n #) plants
27© 2015 Cengage Learning. All Rights Resere!. Ma" n#t $e c#pie!% scanne!% #r !&plicate!% in 'h#le #r in part% e(cept )#r &se as