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4.2 Short Run Costs

4.2 Short Run Costs. 4.2.1 Technical Efficiency 4.2.2 Production and Costs. Application. “With the latest laser technology, first cut is the fleetest” The Times 13 th October 2007. Millennium Star, 203 carat diamond took 3 years to cut Paul van der Steen would have taken 1 month!

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4.2 Short Run Costs

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  1. 4.2 Short Run Costs 4.2.1 Technical Efficiency 4.2.2 Production and Costs

  2. Application “With the latest laser technology, first cut is the fleetest” The Times 13th October 2007 • Millennium Star, 203 carat diamond took 3 years to cut • Paul van der Steen would have taken 1 month! • Matrix Diamond Technology uses computers to calculate cutting planes • Normally get 40% of a diamond left; new technology gains another 20-25%

  3. 4.2.2 Technical Efficiency How do costsinfluence input mix choice? Choice is based on TECHNICAL EFFICIENCY: For a given output, minimise inputs or for a given level of inputs maximise output E.g. ICI has a choice of capital (K) and labour (L) to make 30 mill. litres of paint a. 40L and 5K b. 50L and 3K c. 70L and 3K d. 20L and 7K Can’t tell but it will not be c as technically inefficient

  4. Assumptions: K fixed and costs known but do not vary Total costs (TC) can be split into two separate costs: TOTAL FIXED COSTS (TFC) - do not vary with output TOTAL VARIABLE COSTS (TVC) - vary with output TC = TFC + TVC ATC = TC/Q MC = dTC/dQ AVC = TVC/Q and MC = dTVC/dQ Can now explicitly link production and costs

  5. 4.2.2 Production and Costs TVC = PL L (assume PL is fixed and known) Thus: Recall: or So:

  6. Similarly we see Then Recall So,

  7. TFC Q TVC TC TP L Costs Wl L

  8. TC Cost TVC TFC Q

  9. MC Cost ATC AVC AFC Q

  10. Interim Summary: Firms aim to be technically efficient Have to bear fixed and variable costs Relating output to inputs gives us short run cost curves

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