# ch08 - Chapter 8 Costs Curves 1 Chapter Eight Overview 1...

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1 Costs Curves Chapter 8

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2 Chapter Eight Overview 1. Introduction 1. Long Run Cost Functions Shifts Long run average and marginal cost functions Economies of scale Deadweight loss – "A Perfectly Competitive Market Without Intervention Maximizes Total Surplus" 1. Short Run Cost Functions 1. The Relationship Between Long Run and Short Run Cost Functions Chapter Eight
3 Chapter Eight Long Run Cost Functions Definition: The long run total cost function relates minimized total cost to output, Q, and to the factor prices (w and r). TC(Q,w,r) = wL*(Q,w,r) + rK*(Q,w,r) Where: L* and K* are the long run input demand functions

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4 Chapter Eight Long Run Cost Functions As Quantity of output increases from 1 million to 2 million, with input prices(w, r) constant, cost minimizing input combination moves from TC 1 to TC 2 which gives the TC(Q) curve.
5 Chapter Eight What is the long run total cost function for production function Q = 50L 1/2 K 1/2 ? L*(Q,w,r) = (Q/50)(r/w) 1/2 K*(Q,w,r) = (Q/50)(w/r) 1/2 TC(Q,w,r) = w[(Q/50)(r/w) 1/2 ]+r[(Q/50)(w/r) 1/2 ] = (Q/50)(wr) 1/2 + (Q/50)(wr) 1/2 = (Q/25)(wr) 1/2 What is the graph of the total cost curve when w = 25 and r = 100? TC(Q) = 2Q Long Run Cost Functions

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6 Q (units per year) TC (\$ per year) TC(Q) = 2Q \$4M. Chapter Eight A Total Cost Curve
7 1 M. \$2M. Chapter Eight TC (\$ per year) Q (units per year) TC(Q) = 2Q A Total Cost Curve

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8 1 M. 2 M. \$2M. \$4M. Chapter Eight A Total Cost Curve TC (\$ per year) Q (units per year) TC(Q) = 2Q
9 Chapter Eight Long Run Total Cost Curve Definition: The long run total cost curve shows minimized total cost as output varies, holding input prices constant. Graphically, what does the total cost curve look like if Q varies and w and r are fixed?

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10 Chapter Eight Long Run Total Cost Curve
11 Chapter Eight Long Run Total Cost Curve

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12 Chapter Eight Long Run Total Cost Curve
13 Q (units per year) L (labor services per year) K TC (\$/yr) 0 0 L 0 L 1 K 0 K 1 Q 0 Q 1 TC = TC 1 TC = TC 0 Chapter Eight Long Run Total Cost Curve

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14 Q (units per year) L (labor services per year) K TC (\$/yr) 0 0 LR Total Cost Curve Q 0 TC 0 =wL 0 +rK 0 L 0 L 1 K 0 K 1 Q 0 Q 1 TC = TC 1 TC = TC 0 Chapter Eight Long Run Total Cost Curve
15 Q (units per year) L (labor services per year) K TC (\$/yr) 0 0 LR Total Cost Curve Q 0 Q 1 TC 0 =wL 0 +rK 0 L 0 L 1 K 0 K 1 Q 0 Q 1 TC = TC 1 TC = TC 0 TC 1 =wL 1 +rK 1 Chapter Eight Long Run Total Cost Curve

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16 Chapter Eight Long Run Total Cost Curve Graphically, how does the total cost curve shift if wages rise but the price of capital remains fixed?
17 L K 0 TC 0 /r Chapter Eight A Change in Input Prices

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18 L 0 -w 0 /r TC 0 /r TC 1 /r -w 1 /r Chapter Eight K A Change in Input Prices
19 L 0 A B -w 0 /r TC 0 /r -w 1 /r Chapter Eight TC 1 /r K A Change in Input Prices

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20 L Q 0 0 A -w 0 /r TC 0 /r -w 1 /r Chapter Eight B TC 1 /r K A Change in Input Prices
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