ECON 201 1st Edition Lecture 33Outline of Last Lecture 1.short run vs long run2.product concept and curveOutline of Current Lecture 1. From Product to Cost2. 7 concepts 3.Return to Scale Current LectureFrom Product to Cost• Product graph shows output, q, related to variable input, L.• Inverting the product curve shows input, L, required for output, q.• Rescaling the vertical axis to W x L shows VC for output, q.• Concave shape of product graph is reflected in convex shape of VC graph.– Diminishing Marginal Product becomes increasing Marginal Cost. 7 Cost Concepts ~ 7 Cost Variables: Short Run• Three whole cost concepts: Variable, Fixed, and Total– VC + FC = TC– Measured in $ per time period. e.g. $/mo.• Three average cost concepts: These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.– Average Variable, Average Fixed, Average Total– AVC = VC ⁄ q AFC = FC ⁄ q ATC = TC ⁄ q– Measured in $ per unit of output. e.g. $/lb.– Note: Since TC = VC + FC è ATC = AVC + AFC – Note: Since FC is fixed in relation to q, AFC declines as q increases.• Marginal Cost: MC = ΔVC ⁄ Δq or MC = ΔTC ⁄ Δq– Measured in $ per unit of output. e.g. $/lb.– Marginal Cost is the rate of increase in VC or TC as q increases.– Marginal Cost is the slope of VC or TC graphs.7 Cost Curves ~ Variant 1• For each cost variable we have a graph relating it to output, q. • Graphs have particular relationships to each other.– VC, FC, and TC ~ in one graph space: 3 whole costs.– AVC, AFC, ATC, and MC ~ in another: 4 per unit costs.7 Cost Curves ~ Variant 2• If product curve has an inflection point, so do VC and TC curves.– Example of a furniture factory ~ Teamwork matters.• In this case MC and AVC are also “U” shaped ~ AVC broader. • MC meets AVC at minimum of AVC.Returns to Scale ~ A Long Run Issue• In Long Run ~ only 3 cost concepts: Total, Average, Marginal– LRC LRAC = LRC ⁄ q LRMC = ΔLRC ⁄ Δq• Firms can change all inputs, including scale of production facility.• Firms choose fixed plant & equipment according to expected q.– Best scale minimizes SR–ATC for the expected q. • Increasing Returns to Scale (IRS): LRAC has negative slope.– Also called “Economies of Scale.”• Decreasing Returns to Scale (DRS): LRAC has positive slope.– Also called “Diseconomies of Scale.”• Constant Returns to Scale (CRS): LRAC is flat ~ zero
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