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Chapter 7 micro

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  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Chapter 7 Production and Cost in the Firm
  • Transcript

    • 1. Micro McEachern ECON 2010- 2011 Designed by CHAPTER Production Amy McGuire, B-books, Ltd. 7 Cost in the Firm andChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 1
    • 2. Cost and Profit  Producers: Maximize profit  Opportunity cost – All resources have an opportunity cost  Explicit costs – Payments for resources  Implicit costs – Opportunity cost of resources owned by the firm / firm owners – No cash payment LO 1Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 2
    • 3. Alternative Measures of Profit  Accounting profit – Total revenue minus explicit costs  Economic profit – Total revenue minus all costs (implicit and explicit) • Opportunity cost of all resources  Normal profit – “Accounting profit in excess of normal profit” • Accounting profit = Economic + Normal profit LO1Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 3
    • 4. Example of Economic and Accounting ProfitChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 4
    • 5. Production in the Short Run  Variable resources – Can be varied quickly  Fixed resources – Cannot be altered easily  Short run – At least one resource is fixed  Long run – No resource is fixed LO2Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 5
    • 6. Law of Diminishing Marginal Returns  Total product  Production function – Relationship between amount of resources employed and total product  Marginal product – Change in total product from an additional unit of resource LO2Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 6
    • 7. Law of Diminishing Marginal Returns  Increasing marginal returns – Marginal product increases  Diminishing marginal returns – Marginal product decreases  Law of diminishing marginal returns LO2Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 7
    • 8. http://www.youtube.com/watch?v=69KaFua-_Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 8
    • 9. Example of Law of Diminishing Marginal ReturnsChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 9
    • 10. LO2 Exhibit 2 The Short-Run Relationship Between Units of Labor and Tons of Furniture MovedMarginal product increases as the firm hires each of the first three workers, reflectingincreasing marginal returns. Then marginal product declines, reflecting diminishingmarginal returns. Adding more workers may, at some point, actually reduce total product(as occurs here with an eighth worker) because workers start getting in each other’s way.Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 10
    • 11. LO2 Effects of an Increase in Demand Total product 15 (a) Total product Total (tons/day) product 10Exhibit 3 5 0 5 10 Workers per day Increasing Diminishing but 5 (b) Marginal product Marginal product marginal positive 4 marginal returns Negative returns 3 marginal (tons/day) 2 Marginal returns 1 product 0 5 10 Workers per day Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 11
    • 12. LO3 Costs in the Short Run  Fixed cost FC  For fixed resources  Variable cost VC  For variable resources  Total cost TC = FC + VC  Marginal cost MC = ∆TC/∆q  Change in TC to produce one more unit of outputChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 12
    • 13. LO3 Costs in the Short Run  Changes in MC  Reflect changes in marginal productivity  Increasing marginal returns  MC falls  Diminishing marginal returns  MC increasesChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 13
    • 14. LO3 Exhibit 4 Short-Run Total and Marginal Cost Data for Smoother Mover First 3 workers: increasing marginal returns: MC declines With the 4th worker: diminishing marginal returns: MC increasesChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 14
    • 15. LO3 Exhibit 5 Total and TC is the vertical sum of FC and VC Marginal VC starts from Cost Curves origin; increases for Smoother Mover slowly at first; with diminishing returns, VC increases rapidly FC = $200 at all levels of output MC first declines: increasing marginal returns; then increases: diminishing marginal returnsChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 15
    • 16. Average Cost in the $ LO 3 Short Run  Average variable cost AVC = VC/q  Average total cost ATC = TC/q  When MC < average cost  The marginal pulls down the average  When MC > average cost  The marginal pulls up the average  U-shape of average cost curves  Law of diminishing marginal returnsChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 16
    • 17. LO3 Exhibit 6 Short-Run Total, Marginal, and Average Cost Data for Smoother Mover MC first falls then increases (increasing then diminishing marginal returns) As long as MC < AC, average cost declines Once MC > AC, average cost increasesChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 17
    • 18. LO3 Exhibit 7 Average and Marginal Cost Curves for Smoother Mover When MC is above AVC (ATC), AVC (ATC) is increasing. ATC and AVC: decline, reach low points, then rise. When MC is below AVC (ATC), AVC (ATC) is falling When MC = AVC (ATC), AVC (ATC) is at its minimum.Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 18
    • 19. Example of CostsChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 19
    • 20. Costs in the Long Run  All resources can be varied  Planning horizon  Firms plan in the long run  Firms produce in short run LO4Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 20
    • 21. Costs in the Long Run  U-shaped long-run average cost curve  Economies of scale – LRAC falls as output expands – Labor specialization – Managerial Specialization – Efficient Capital  Diseconomies of scale – LRAC increases as output expands 4 Constant lung-run average cost  LOChapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 21
    • 22. LO4 Short-Run Average Total Cost Curves Form the Long-Run Average Cost Curve, or Planning CurveExhibit 8 SS’, MM’, LL’ are short run ATC curves S L’ M M’ Cost per unit a S’ L b Long run ATC curve: SabL’ 0 q qa q’ qb Output per period Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 22
    • 23. LO4 Exhibit 9 Many Short-Run ATC Curves Form a Firm’s LRAC Curve, or Planning Curve ATC1 ATC10 ATC9 ATC2 Long-run $11 a b ATC8 average cost 10Cost per unit 9 ATC3 ATC7 c ATC4 ATC6 Many possible plant sizes ATC5 Each short-run curve is tangent to the long run average cost curve 0 q q’ Output per periodEach point of tangency represents the least cost way of producing that level of output Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 23
    • 24. LO4 A Firm’s Long-Run Average Cost CurveExhibit 10 Long-run Cost per unit average cost 0 A B Output per period Economies Constant Diseconomies of scale average cost of scale Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 24
    • 25. Economies and Diseconomies of Scale  Plant level – Particular location  Firm level – Collection of plants LO4Chapter 7 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 25

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