Professional Documents
Culture Documents
CH 06
CH 06
Costs
3
Labor Costs
4
Capital Costs
5
Capital Costs
6
APPLICATION 6.1: Stranded Costs and
Electricity Deregulation
7
The Nature of Stranded Costs
8
The Nature of Stranded Costs
9
The Legal Framework--Socking It to
the Consumer
10
The Legal Framework--Socking It to
the Consumer
11
Entrepreneurial Costs
12
The Legal Framework--Socking It to
the Consumer
13
Two Simplifying Assumptions
14
Economic Profits and Cost
Minimization
15
Economic Profits and Cost
Minimization
16
Cost-Minimizing Input Choice
17
Cost-Minimizing Input Choice
w
RTS ( of L for K)
v
18
Graphic Presentation
TC1
TC2
TC3
K*
q1
0 L* Labor
per week
20
Graphic Presentation
21
An Alternative Interpretation
or, rearranging
MPL w
RTS ,
MPK v
MPL MPK
.
w v
22
The Firm’s Expansion Path
A similar analysis could be performed for any
output level (q).
If input costs (w and v) remain constant,
various cost-minimizing choices can be
traces out as shown in Figure 6.2.
For example, output level q1 is produced
using K1, L1, and other cost-minimizing points
are shown by the tangency between the total
cost lines and the isoquants.
23
The Firm’s Expansion Path
24
FIGURE 6.2: Firm’s Expansion Path
Capital
per week
TC1 TC3
TC2
Expansion path
q3
K1 q2
q1
0 L1 Labor
per week
25
Cost Curves
26
Cost Curves
27
FIGURE 6.3: Possible Shapes of the
Total Cost Curve
TC
Total
cost
0 Quantity
per week
(a) Constant Returns to Scale
28
Cost Curves
29
FIGURE 6.3: Possible Shapes of the
Total Cost Curve
TC
Total Total TC
cost cost
0 Quantity 0 Quantity
per week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
Total
cost TC
0 Quantity
per week
30 (c) Increasing Returns to Scale
Cost Curves
31
FIGURE 6.3: Possible Shapes of the
Total Cost Curve
TC
Total Total TC
cost cost
0 Quantity 0 Quantity
per week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
Total TC
TC Total
cost
cost
0 Quantity Quantity
per week 0
per week
32 (c) Increasing Returns to Scale (d) Optimal Scale
Average Costs
TC
Average cost AC
q
Average cost is total cost divided by output; a
common measure of cost per unit.
If the total cost of producing 25 units is $100,
the average cost would be
$100
AC $4
25
33
Marginal Cost
Change in TC
Marginal cost MC
Change in q
The additional cost of producing one more
unit of output is marginal cost.
If the cost of producing 24 units is $98 and
the cost of producing 25 units is $100, the
marginal cost of the 25th unit is $2.
34
Marginal Cost Curves
35
FIGURE 6.4: Average and Marginal
Cost Curves
AC, MC
AC, MC
0 Quantity
per week
(a) Constant Returns to Scale
36
Marginal Cost Curves
37
FIGURE 6.4: Average and Marginal
Cost Curves
AC, MC AC, MC MC
AC
AC, MC
0 Quantity 0 Quantity
per week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
38
Marginal Cost Curves
39
FIGURE 6.4: Average and Marginal
Cost Curves
AC, MC AC, MC MC
AC
AC, MC
0 Quantity 0 Quantity
per week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
AC, MC
AC
MC
0 Quantity
per week
41
FIGURE 6.4: Average and Marginal
Cost Curves
AC, MC AC, MC MC
AC
AC, MC
0 Quantity 0 Quantity
per week per week
(a) Constant Returns to Scale (b) Decreasing Returns to Scale
AC, MC AC, MC AC
MC
AC
MC
0 Quantity 0 q* Quantity
per week per week
43
Average Cost Curves
44
Average Cost Curves
45
Average Cost Curves
46
Average Cost Curves
47
Average Cost Curves
48
FIGURE 1: Long-Run Average Cost
Curve Found in Many Empirical Studies
Average
cost
AC
0 q* Quantity
per period
49
APPLICATION 6.2: Findings on Firms’
Costs
Firm Size
Industry Small Medium Large
Aluminum 166.6 131.3 100.0
Automobiles 144.5 122.7 100.0
Electric power 113.2 101.1 101.5
HMOs 118.0 106.3 100.0
Hospitals 129.6 111.1 100.0
Life insurance 113.6 104.5 100.0
Lotteries (state) 175.0 125.0 100.0
Sewage treatment 104.0 101.0 100.0
Trucking 100.0 102.1 105.6
51
APPLICATION 6.3: Airlines’ Costs
52
Reasons for Differences among U.S.
Firms
53
Reasons for Differences among U.S.
Firms
54
International Airline Regulation and
Costs
55
Distinction between the Short Run
and the Long Run
56
Holding Capital Input Constant
57
Types of Short-Run Costs
58
Input Inflexibility and Cost
Minimization
59
FIGURE 6.5: “Nonoptimal” Input
Choices Must Be Made in the Short Run
Capital
per week
STC0 STC2
STC1
K1
q2
q1
q0
0 L0 L1 L2 Labor
60 per week
Input Inflexibility and Cost
Minimization
STC
Short - run average cost SAC
q
and
Change in STC
Short - run marginal cost SMC
Change in q
62
Per-Unit Short-Run Cost Curves
Having capital fixed in the short run yields a
total cost curve that has both concave and
convex sections, the resulting short-run
average and marginal cost relationships will
also be U-shaped.
When SMC < SAC, average cost is falling, but
when SMC > SAC average cost increase.
63
Relationship between Short-Run and
Long-Run per-Unit Cost Curves
64
FIGURE 6.6: Short-Run and Long-Run Average and
Marginal Cost Curves at Optimal Output Level
AC, MC
MC
AC
SMC
SAC
0 q* Quantity
per week
65
Relationship between Short-Run and
Long-Run per-Unit Cost Curves
66
APPLICATION 6.4: Can We Do Anything
About Traffic Snarls?
67
APPLICATION 6.4: Can We Do Anything
About Traffic Snarls?
68
APPLICATION 6.4: Can We Do Anything
About Traffic Snarls?
69
Congestion Tolls
70
Toll-Collecting Technology
71
Shifts in Cost Curves
72
Changes in Input Prices
73
Changes in Input Prices
74
Technological Innovation
75
Technological Innovation
76
Economies of Scope
77
APPLICATION 6.5: Economies of Scope
in Banks and Hospitals
78
APPLICATION 6.5: Economies of Scope
in Banks and Hospitals
79
APPLICATION 6.5: Economies of Scope
in Banks and Hospitals
80
APPLICATION 6.5: Economies of Scope
in Banks and Hospitals
81
A Numerical Example
82
A Numerical Example
83
TABLE 6.1: Total Costs of Producing 40
Hamburgers per Hour
84
Figure 6.7: Cost-Minimizing Input
Choice for 40 Hamburgers per Hour
Grills
per hour
8 E
0 2 4 8
Workers
85 per hour
Long-Run cost Curves
86
Long-Run cost Curves
87
FIGURE 6.8: Total, Average, and
Marginal Cost Curves
Total Average and
costs marginal costs
Total
costs
$80
60
40
Average and
20 $1.00 marginal costs
0 20 40 60 80 Hamburgers 0 20 40 60 80 Hamburgers
per hour per hour
(a) Total Costs (b) Average and Marginal Costs
88
Short-Run Costs
89
TABLE 6.2: Short-Run Costs of
Hamburger Production
90
FIGURE 6.12: Short-Run and Long-Run Average and
Marginal Cost Curves for Hamburger Heaven
Average and
marginal costs
$2.50
SMC (4 grills)
2.00
SAC (4 grills)
1.50
1.00 AC, MC
.50
0 20 40 60 80 100 Hamburgers
per hour
91