Chapter 8

Chapter 8 - CHAPTER 8 successive units of a variable...

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Unformatted text preview: CHAPTER 8 successive units of a variable resource (i.e. labor) are Economic cost (aka. opportunity cost): the value or worth the resource would have in its best alternative use Explicit costs (of a firm): the monetary payments (or cash expenditures) it makes to those who supply labor services, materials, fuel, transportation services, and the like (for the use of resources owned by others) Implicit costs (of a firm): the opportunity costs of using its self-owned, self-employed resources (the money payments that self-employed resources could have earned in their best alternative use) 0 Normal profit: payment made by a firm to obtain and retain entrepreneurial ability; the payment you could otherwise receive for performing entrepreneurial functions (type of implicit cost) Economic profit (from economist’s POV): total revenue - economic costs 0 Figure 8.1: Economic profit vs. Accounting profit (Page 146) Short run (“fixed plant” period): a period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the fixed plant is used 0 Applying larger or smaller amounts of labor, materials, and other sources to the plant Long run (“variable plant” period): a period long enough for a plant to adjust the quantities of all the resources that it employs, including plant capacity 0 Includes enough time for existing firms to dissolve and leave the industry or for new firms to be created and enter the industry Total product (T P): the total quantity, or total output, or a particular good or service produced Marginal product (MP): the extra output or added product associated with adding a unit of variable resource, in this case labor, to the production process 0 MP = change in total product/ change in labor input Average product (AP): aka. labor productivity, the output per unit of labor input 0 AP = total product! units of labor am» added to a fixed resource (i.e. capital or land), beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline 0 Assumes that technology is fixed and thus the techniques of production do not change 0 Assumes all units of labor are of equal quality 0 See Figure 8.2 Law of Diminishing Returns (Page 149) Short run production costs (look at all graphs Pages 151—155) 0 Fixed costs: costs that in total do not vary with changes in output I Associated with the existence of a firm’s plant and must be paid even if its output is zero I I.e. rental payments, interest on a firm’s debts, a portion of depreciation on equipment and buildings, and insurance premiums 0 Variable costs: costs that change with level of output I I.e. payments for materials, fuel, power, transportation services, most labor, and similar variable resources 0 Total cost: the sum of fixed cot and variable cost at each level of output I TC = TFC + TVC 0 Average fixed cost (AFC): total fixed cost divided by the output I AFC = TFC / Q I Declines as output increases because TFC remains the same 0 Average variable cost (AVC): total variable cost divided by output I AVC = TVC / Q I U-shaped curve 0 Average total cost (ATC): total cost divided by output I ATC = TC/Q = TFC/Q + TVC/Q = AFC + AVC o Marginal cost: extra or additional cost of producing one more unit of output I MC = change in TC/change in Q I Graph is a reflection of the marginal product curve 0 Long run production costs (of a single plant) (See all graphs, pages 156-158) 0 For a time, successively larger plants will lower average total cost. However, the building of a still lager plant may cause the ATC to rise 0 Long run cost curve aka. planning curve is made up of segments of the short run cost curves of the various size plants from which the firm might choose (ATC curves) 0 Long-run ATC curve is made up of all the points of tangency of the unlimited number of short—run ATC curves from which the long ——run ATC curve is derived (U-Shaped) Law of diminishing returns does NOT apply to long-run Assume resource prices are constant Economies of scale (aka. economies of mass production): reductions in the average total cost of producing a product as the firm expands the size of plan (its output) in the long run; explains the down-sloping part of the long-run ATC curve I Labor specialization I Managerial specialization I Efficient capital I Other factors I Start up costs, advertising costs I Firm’s production and marketing expertise usually rises as it produces and sells more output 0 p _ of increase in the average total cost of producing a product the firm expands the size of ties plant (its output) in the long-run; accounts for the rising portion of the long-run cost curve I Difficulty of efiiciently controlling and coordinating a firm’s operations as it becomes a large—scale producer I Decision making may be slowed down to the point that decisions fail to reflect changes in consumer tastes or technology quickly enough I Workers may feel alienated from their employers and care little about working efficiently o Constant returns to scale: unchanging average total cost of producing a product as a firm expands the size of its plant (its output) in the long run 000 0 Minimum effect scale (MES): the lowest level of output at which a firm can minimize long-run average cost 0 Natural monopoly: a relatively rare market situation in which average total cost is minimized when only one firm produces the particular good or service 0 Long run ATC curve can be significant in determining whether an industry is populated by a relatively large number of small firms or is dominated by a few large produces, or lies somewhere in between ...
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This note was uploaded on 06/26/2009 for the course ECON 205 taught by Professor Kamrany during the Fall '07 term at USC.

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Chapter 8 - CHAPTER 8 successive units of a variable...

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