Perloff_397614_IM_Ch07

Perloff_397614_IM_Ch07 - Chapter 7 Costs Chapter Outline...

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Chapter 7 Costs ± Chapter Outline 7.1 Measuring Costs Economic Cost Capital Costs 7.2 Short-Run Costs Short-Run Cost Measures Short-Run Cost Curves Production Functions and the Shapes of Cost Curves Effects of Taxes on Costs Short-Run Cost Summary 7.3 Long-Run Costs Input Choice How Long-Run Cost Varies with Output The Shape of Long-Run Cost Curves Estimating Cost Curves Versus Introspection 7.4 Lower Costs in the Long Run Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves Short-Run and Long-Run Expansion Paths How Learning by Doing Lowers Costs 7.5 Cost of Producing Multiple Goods ± Teaching Tips The material in Chapter 7 is undoubtedly some of the most important in the entire text. If students are to have any significant level of understanding of how firms make production decisions when faced with various industry structures and levels of market power, they must have a sound understanding of cost. For this reason, you may want to build in an extra class period for this chapter over and above what you think it will require. This way, if you are on schedule, you can always use the day to have the class work on problem sets or applications. If you are running behind, the extra day will prevent you from having to rush through this important material. You might begin by asking the class for the kinds of costs that firms must consider. You are likely to get most or all of the private, explicit costs—labor, materials, and capital—but you may or may not get suggestions of opportunity costs and social costs. Once you have completed a list, you can distinguish between cost types, and discuss the importance of measuring cost as opportunity costs. You may want to
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Chapter 7 Costs 87 take some time to discuss externalities, and give some examples of firms’ attempts to internalize them (and why they would do so), such as the production of dolphin-safe tuna. Finally, some students may question the lack of attention paid to materials as an input and question the assumption that material use is independent of the capital–labor mix. As with the production definitions, you can use a running example of output and cost figures that are presented in a table, and subsequently in graphs. Remind students whenever possible that the information here is directly related to the production function. The text makes specific note of the shape of the variable cost curve and its relationship to the diminishing marginal returns to labor. This link is further reinforced by Equations 7.1 ( MC = w / MP L ) and 7.2 ( AVC = w / AP L ). Marginal cost and marginal product curves can be described as inverted images of one another, noting that the characteristic “check-mark” or “fish hook” shape is always there in one if it is there in the other for any given production function. The same applies to the average product and average cost curves (as well as their intersection with their respective marginal curves).
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Perloff_397614_IM_Ch07 - Chapter 7 Costs Chapter Outline...

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