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CHAPTER 11 PRODUCTION TECHNOLOGY AND COST 1. Chapter Summary 2. Chapter Objectives 3. Chapter Outline Teaching Tips/Topics for Class Discussion 4. Extended Examples Extended Example 1:   Calculating Costs Extended Example 2:   Scale Economies in Business 5. Problems And Discussion Questions 6. Model Answers to Questions:  Chapter Opening Questions Test Your Understanding Using the Tools 7. Economics Applied - Using What You’ve Learned 1. Chapter Summary Chapter 11 introduces short-run production functions, and variable and fixed costs, explaining their calculation and how to draw the related curves. In the short run, marginal costs are expected to be increasing due to diminishing returns, average cost curves are expected to be U-shaped. In the long run, firms may experience economies of scale due to specialization or spreading of the cost of indivisible inputs, and thus long-run average cost curves will be L-shaped as per-unit costs first decrease and then remain constant. The minimum efficient scale is reached when economies of scale are exhausted and per-unit costs become constant. Eventually, the firm may experience diseconomies of scale due to coordination problems or rising input prices, resulting in increasing per-unit costs. 2. Chapter Objectives 1. Why is the typical short-run average-cost curve shaped like the letter U, while the typical long-run average-cost curve is shaped like the letter L? 2. If the short-run average cost of production is the same for two different quantities of output, can it be the same for three different quantities? 3. The cost of producing the first fake killer whale is about three times the costs of producing the second. Why? 4. How does the cost of electricity vary with the size of the wind turbine used to generate it? 3. Chapter Outline 136
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137 Chapter 11 I. Introduction A. Economic Cost Is Opportunity Cost 1. An accountant computes a firm’s explicit costs (actual cash payments for inputs) and calculates profits by subtracting explicit costs from total revenue. 2. An economist includes the firm’s implicit costs (opportunity costs, including costs of the entrepreneur’s time and/or funds) and calculates profit by subtracting economic cost (explicit plus implicit costs) from total revenue. B. Short-Run versus Long-Run Costs 1. In the short run, with at least one factor of production fixed, a firm with an existing production facility must decide how much output to produce. 2. In the long run, a firm must decide what type of production facility to build, because, in the long run, all factors of production can be varied Teaching Tip: A good way to explain the long run is to ask students how far ahead they plan in order to answer the question, “What are you going to do for the rest of your life?". In the long run, everything changes.
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