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Unformatted text preview: Chapter 10 Costs Chapter Summary This chapter covers cost curves in both the short run and the long run. The chapter begins with the short run and the distinction between fixed and variable costs; next the discussion turns to average fixed cost, average variable cost, and average total cost. Using an example of a dry cleaning business, Kelly's Cleaners, the chapter demonstrates the relationship between a simple production function with labor as the sole variable input (the type developed at the beginning of Chapter 9) and the short-run cost curves. Finally, the marginal cost curve is introduced, and the relationship between marginal cost and ATC and AVC is discussed. The second half of the chapter deals with costs in the long run. It begins with a discussion of isocost lines and develops the optimal output combination using isocost lines and isoquants. Next, the output expansion path is developed using isoquants and isocost lines. The output expansion path can be used to derive the long-run cost curves. The text illustrates the LTC, LMC and LAC curves for increasing, decreasing, and constant returns to scale; the relationship between the shape of the LAC curve and the structure of industry is briefly discussed. The appendix discusses the relationship between long-run and short-run cost curves and some mathematical applications of cost minimization. Chapter Outline Chapter Preview Costs in the Short Run Allocating Production between Two Processes The Relationship between MP, AP, MC, and AVC Costs in the Long Run Long-Run Costs and the Structure of Industry Summary Appendix: The Relationship between Long-Run and Short-Run Cost Curves Appendix: A Calculus Approach to Cost Minimization Teaching Suggestions 1. It pays to spend part of a class period making sure that the concept of cost is understood. Try some of the following questions on your students. a. Why will an ice cream stand on Main Street with the same product as a similar stand on a back street not necessarily be more profitable? (Assume service and quality are identical.) b. Why is a volunteer army, which pays the going wage, less costly than a draft, which pays everyone a submarket wage? c. What happens to your cost of living if your landlord dies and wills your apartment to you? Are you better or worse off? d. You make $50,000 in a small family business, and that amount keeps going up $5,000 every year. A friend keeps trying to entice you to join his business. He keeps raising his offer to you by $6,000 a year. What is happening to your economic profits over the years? 2. The chapter summary begins with the following statement: "Of all the topics covered in microeconomics, students usually find the material on cost curves most difficult to digest....
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- Spring '11