Escolar Documentos
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Opportunity cost
Economic O
T
Profit A Accounting
L Profit
Implicit costs
R
E
V
Explicit Accounting
E
costs (explicit
Costs N
U costs only)
E
•Suppose you are sales representative for a T-short
• fdf
manufacturer
•Earning 22000$ per year
•You decided to open a retail store of your own
•You invest 20000$ from savings & made a sacrifice of 1000$
interest
• this shop is renting out for 5000$
•You also hire clerk & paying 18000$ annually
•A year after you open the store, you total up your Accounts
& find the following
Total sales Revenue 120000$
Cost of T-Shirt 40000$
Clerk salary 18000$
Utilities 5000$
Total (explicit) cost (63000$)
Accounting Profit 57000$
•But this 57000 ignores your implicit cost
•22000$ salary you are getting before opening store
•1000$ interest you are getting annually
•5000$ rent you may get when you rented out your shop
annually
•And lets take your entrepreneurial talent is worth say 5000$
annually
Accounting Profit 57000
Forgone Interest 1000
Forgone rent 5000
Forgone wages 22000
Forgone 5000
entrepreneurial income
Total implicit cost (33000)
Economic Profit 24000
• Difference between short & long Run for
production point of view
•The period of time in which one (or more) of the resources employed in a
production process is fixed or incapable of being varied.
•For example, for a production plant of fixed size and capacity, the firm can
increase output only by employing more labor, such as by paying workers
overtime or by scheduling additional shifts.
Variable Plant
•For e.g: That is, they can change the amount of all inputs used. The firm can
alter its plant capacity, it can build a larger plant or revert to a smaller plant
Quantity of Labor
Average Increasing Diminishing Negative
Product, AP, Marginal Marginal Marginal
Returns Returns Returns
and
Marginal Average
Product, MP
Product
Marginal
Quantity of Labor Product
Returns to scale
In economics, returns to
scale and economies of scale are
related terms that describe what
happens as the scale of production
increases
6 B
200Q
3 A
100Q
3 6
Increasing returns to scale
6 C
300Q
3 A
100Q
Labor
3 6
Decreasing Returns to Scale
capital
6
D
150Q
3 A
100Q
labor
3 6
• Short Run Costs are either fixed or Variable
Total Variable
Cost Cost
TFC
Quantity
Average cost is the total cost divided by the total
number of units produced.
OR
Average cost is the sum of average variable costs plus
average fixed costs.
MC = Change in TC
Change in Q
HORT RUN SCHEDULE FOR VARIOUS COST
0.94
(b) Marginal- and Average-Cost Curves
Costs
$3.00
2.50
MC
2.00
1.50
ATC
AVC
1.00
0.50
AFC
0 2 4 6 8 10 12 14
Quantity of Output (bagels per hour)
Suppose a baseball pitcher has allowed his
opponents an average of 3 runs per game in the
first three games. Now, Whether his average falls or
rises as a result of pitching a 4th(marginal) game will
depend on whether the additional runs he allowed in
the extra game are fewer or more than his current (3)
run avg. If the 4th game he allows fewer than (3) run,
for e.g., 1 run, his total runs will rise from 9 to 10 and
his Avg. will fall from (3) to (2.5). Conversely, if in the
4th game he allows more than 3 runs say, (7), his total
will increase from (9) to (16) and his avg. will rise from
3 to 4 (=16/4).
Reference: Mcconell Page number 425
Cost Curves Relations
MC relationship to AVC and AC
MC below AVC and AC, AVC and AC will
falling
MC above AVC and AC, AVC and AC will
rising
MC equals AVC, AVC at minimum
MC equals AC, AC at minimum
Quantity of output
MP
MC
AP
AVC
PART III
PART III
LONG-RUN
http://www.scribd.com/doc/6607244/Cost-of-Production
ATC
ATC 4
Output
• The long run ATC curves shows the lowest
average total cost at which any out put level can
be produces after the firm has had the time to
make all appropriate adjustments in its plant
size.
Average total cost
Long run
ATC
Out put
• refer to the property
whereby long-run average total cost falls as the
quantity of output increases.
• refer to the property
whereby long-run average total cost rises as the
quantity of output increases.
• refers to the
property whereby long-run average total cost
stays the same as the quantity of output
increases
Economies Constant returnsDiseconomies
of scale to scale of scale
Average total cost
long-run ATC
Out put
Average total cost
long-run ATC
Out put
long-run ATC
Average total cost
Out put