1. Output and Costs
Macroeconomic Foundation
Alaleh Mani
2011

2. Survival key of business
• Is not about its size :Garage, Convenience store, GM
• Is how to produce to minimize the cost (P)
Depend on Market Structure
• Is how much to produce(Q)
• Is How soon to produce:
1. Short- run:
2. Long run:

3. Short Run
 At least one factor of production is fixed:
 Land, capital, entrepreneurship =firm’s Plant
are fixed
 but labor is variable (CFA 2009)
 To produce more in short run firms need to
increase its variable factor
 Short run are easily reversed

4. Long Run
 A time frame that all factors of production are
Variable
 Land, capital, entrepreneurship =firm’s Plant and
labor are variable
 To produce more in long run firms may increase the
plant or labor.
 Long run are not easily reversed
 Sunk Cost: Past expenditure with no resale value that
has no relation with current decision (CFA 2007-2010)
 Only Short run and long run decision influence on
current decision (exam 2008)

5. Short run production
• Relation between output and Labor (exam
2007)
Production Possibility Curve
Output per day
Attainable Area Attainable Area
Inefficient
Hours and minutes

6. Short Run Marginal Product Curve
MP of Law Of
additional Diminishing
worker exceed Returns
MP of last
worker
Law of Diminishing: Marginal
Same Capital
Specialization Same Space Production of one added unit
and Division more worker of variable factor will
diminish

7. Short Run Average Production Curve
Maximum point
Maximum point

8. Short Run Costs
Marginal total cost Change direction=inflection point
MC
=Cost of plant+ normal profit +sunk cost
Low Output
Economic of Scope Law of diminishing return

9. Short Run Average Cost
ATC is U Shape:
•AFC diminishing
•Return diminishing

10. Technology
and Cost

11. Shift in cost curve
• Technology:
Cost ATC2
ATC1
AVC1
AVC2
AFC2
AFC1
Output
More Plant
Less Labor

12. • Price of factor Production:
Rent є Fixed Cost exp: interest rate of a truck
Wage є Variable Cost exp: Driver fare
If rent changes: FC, TFC, VFC, AFC would change
If wage change: VC, TVC, AVC, MC would change

13. A short brief

14. Long Run Cost
scallop-shaped
planning Curve
∆output%=∆Production factor%
∆output%<∆Production factor%
∆output%>∆Production factor%
greater capitalization
of labor and capital
Difficulties of management
Minimum
efficient
Scale
Economically efficient plant size in short run