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ECN 3100

ECN 3100. Chapter 13 The Costs of Production (summary & conclusion). The Production Function. Q output. Marginal Product the increase in output because of an additional unit of input. Diminishing Marginal Product

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ECN 3100

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  1. ECN 3100 Chapter 13 The Costs of Production (summary & conclusion) Chapter 13 (concl.)

  2. The Production Function Q output • Marginal Product • the increase in output because of an additional unit of input. • Diminishing Marginal Product • “the marginal product (MP) of an input declines as the quantity of the input increases” • MP positive, TP increases • MP = 0, TP maximum • MP negative, TP decreases TP Q input (i.e. Q labour) MP Chapter 13 (concl.)

  3. Total Costs Curves • TC = TFC + TVC • TC begins at positive TFC value and increases with the quantity of output produced, parallel to TVC. • TVC begins at 0 value and increases with the quantity of output produced. • TFC remains constant at a positive value. Cost TC TVC TFC Q output Chapter 13 (concl.)

  4. Average Costs Curves Cost MC < ATC, ATC decreases MC = ATC, ATC minimum MC > ATC, ATC increases MC < AVC, AVC decreases MC = AVC, AVC minimum MC > AVC, AVC increases AFC decreases with quantity of output produced. MC ATC AVC AFC Q output Chapter 13 (concl.)

  5. Short-run Costs vs Long-run Costs Cost SRAC7 SRAC6 SRAC1 SRAC2 SRAC3 SRAC4 SRAC5 LRAC Q output Chapter 13 (concl.)

  6. Short-run Costs vs Long-run Costs Cost SRAC Firm 3 SRAC Firm 1 SRAC Firm 2 LRAC Constant Returns to Scale Diseconomies of Scale Economies of Scale Q output Chapter 13 (concl.)

  7. Short-run Costs vs Long-run Costs Cost LRAC Diseconomies of Scale = Increasing Returns to Scale Economies of Scale = Decreasing Returns to Scale Constant Returns to Scale Q output Chapter 13 (concl.)

  8. Short-run Costs vs Long-run Costs • Economies of scaleLRAC decreases as Qoutput increases (decreasing returns to scale). • Diseconomies of scaleLRAC increases as Qoutput increases (increasing returns to scale). • Constant returns to scaleLRAC remains constant as Qoutput increases. Chapter 13 (concl.)

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