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Production and Cost: Slides by John F. Hall
Production and Cost: Slides by John F. Hall
Owners
Customers
Alternative Different
Input
Production Quantities of
Combinations Function Output
1 2 3 4 5 6 Number of Workers
increasing diminishing
marginal marginal returns
returns
Lieberman & Hall; Introduction to Economics, 2005
11
Marginal Returns To Labor
As more and more workers are hired
MPL first increases
Then decreases
Pattern is believed to be typical at many
types of firms
Dollars
$435 TC
TFC
AFC
Q
• Average variable cost (TVC)
– Total variable cost divided by the quantity of output produced
TVC
AVC
Q
• Average total cost (TC)
– Total cost divided by the quantity of output produced
TC
ATC
Q
AFC ATC
2 AVC
Dollars
ATC1 LRATC
$4.00 ATC3
ATC0 ATC2
3.00 C
D
2.00 B
A E
1.00
3.00
LRATC
2.00
1.00
0 130 184
$160 F
E
80
DMarket
LRATCTypical Firm
Dollars
$160
80
DMarket
0 100,000
Units per Month
Lieberman & Hall; Introduction to Economics, 2005
42
Figure 8: How LRATC Helps Explain
Market Structure
A Market with a Few Large Firms
Dollars
LRATCTypical Firm
$200 H F
E
80
DMarket
0 25,000 100,000
Units per Month
$160
E F
80
DMarket