PMORSe PPETU#1

Costs of Production

All firms

What are Costs?

Firm ...................................... ............................

(ECONOMIC COSTS)

..(EXPLICIT)

/

..(IMPLICIT).............................................................................................

Economic Profit is often called the pure profit. It keeps the entrepreneur in place and is the re

E
C
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I O
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Economic
Profit

TOTAL
Accounting
Profit
REVEN
UE

Implicit costs
inc. Normal
Profit

Accounting Cost Explicit costs only

Explicit
costs

Short RunFIXED PLANT

Output (adding) input

Existing plant capacity can be used more or less intensively

Long RunVARIABLE PLANT
Period of time



Enough time for existing firms to dissolve and exit the industry OR for new
firms to form and enter the industry.

PMORSe PPETU#1

Short Run Relationships

Terms
(Total Product) :TP :Q

(Marginal Product) :MP

.
change in total product OR
change in labor input

(Average Product) :AP

equals total product OR

units of labor
Law of Diminishing Returns

(1) Units
of a
variable
resource
(labor)

0
1
2
3
4
5
6
7
8

(2)
Total
Product

(3)
Marginal
Product
in 2 / in 1

(4)
Average
Product
2 / 1

TP

TP

0
10
25
45
60
70
75
75
70

10
See Key Graph
p. 420 in Text
Quantity of Labor

Note

MP
Increasing Marginal Returns
Negative
Marginal Returns
Diminishing
Marginal Returns

AP

Quantity of Labor
MP

PMORSe PPETU#1
P.3

Short Run Costs

...........................................



0 1 .(
/)

..................................



;

; law of diminishing returns
.. easier to control these
types of costs

(TOTAL COSTS) ................................................

(PER UNIT OR AVERAGE COSTS)

AFC = .
AVC = .. ATC
= ..or
(MARGINAL COSTS) 1

AFC (
/) output

P/C

AVC
ATC
MC.
MC intersects with

When MC < ATC, ATC is

When MC > ATC, ATC is ..

There is no relationship between and..

Long Run relationships

Firm
Input


.....................................
. Firm
.............................................

A
T
C

Economies of scale ()
Constant Returns to

Diseconomies of Scale ()

PMORSe PPETU#1
Purely
Competitive
Number of
firms

Monopolistic
Competitive

Oligopoly

Pure Monopoly