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8/12/2019 Microeconomics Ch 21
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M i c r o e c o n o m i c
s
Dr. Karim Kobeissi
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WHAT ARE COSTS?
According to the Law of Supply: Fir! are willing to produce and !ell a
greater "uantity of a good when the
price of the good i! high#Thi! re!ult! in a !upply cur$e that !lope!
upward#
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Total Re$enue% Total Co!t% and &ro't
Total RevenueThe aount a 'r recei$e! for the sale
of its output.
Total CostThe market value of the inputs a 'r
u!e! in production#
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Total Re$enue% Total Co!t% and &ro't
Profti! the 'r(! total re$enueinu! it! total co!t#
&ro't ) Total re$enue * Total co!t
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Co!t! a! Opportunity Co!t!
A 'r(! co!t of production include! allthe opportunity co!t! of a+ing it!output of good! and !er$ice!#
E,plicit and -plicit Co!t! A 'r(! co!t of production include explicit
costsand implicit costs.
E,plicit co!t! are input co!t! that re"uire adirect e,penditure of oney .y the 'r#
-plicit co!t! are input co!t! that do not re"uirean e,penditure of oney .y the 'r#
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Econoic &ro't $er!u! Accounting
&ro't
Econoi!t! ea!ure a 'r(! economicprofta! total re$enue inu! total co!t%including .oth e,plicit and iplicit co!t!#
Accountant! ea!ure the accountingproft a! the 'r(! total re$enue inu!only the 'r(! e,plicit co!t!#
Econoic pro't i! !aller thanaccounting pro't#
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Econoic &ro't $er!u! Accounting &ro't
When total re$enue e,ceed! .oth
e,plicit and iplicit co!t!% the 'r
earn! econoic pro't#
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&RO/0CT-O1 A1/ COSTS
The &roduction Function
- The production unction shows therelationship between quantity o inputs
used to mae a good and the quantity ooutput o that good.
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The &roduction Function
2arginal &roduct
The marginal product o any input in the
production proce!! is the increase in
output that ari!e! fro an additional
unit of that input#
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The &roduction Function
!iminishing marginal product i! theproperty where.y the arginal productof an input decline! a! the "uantity of
the input increa!e!#
E,aple: A! ore and ore wor+er! are
hired at a 'r% each additional wor+er
contri.ute! le!! and le!! to production
.ecau!e the 'r ha! a liited aount of
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The &roduction Function
/iini!hing 2arginal &roduct
The !lope of the production function
ea!ure! the arginal product of an
input% !uch a! a wor+er#
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The &roduction Function
/iini!hing 2arginal &roduct
When the arginal product decline!% the
production function .ecoe! 3atter#
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Fro the &roduction Function to the Total*Co!t Cur$e
The relation!hip .etween the"uantity a 'r can produce and it!co!t! deterine! pricing deci!ion!#
The total*co!t cur$e !how! thi!relation!hip graphically#
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THE 4AR-O0S 2EAS0RES OF COST
Co!t! of production ay .e di$ided
intofxed costsand variable costs# Fixed costsare tho!e co!t! that do
not varywith the "uantity of outputproduced#
Variable costsare tho!e co!t! that dovary with the "uantity of outputproduced#
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Fi,ed and 4aria.le Co!t!
Total Co!t!Total Fi,ed Co!t! 5TFC6
Total 4aria.le Co!t! 5T4C6
Total Co!t! 5TC6
TC) T"C7 T#C
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Fi,ed and 4aria.le Co!t!
A$erage Co!t!
A$erage co!t! can .e deterined .y di$iding the
'r(! co!t! .y the "uantity of output it produce!#
The a$erage co!t i! the co!t of each typical unit
of product#
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Fi,ed and 4aria.le Co!t!
A$erage Co!t!
$verage "ixed Costs5AFC6
$verage #ariable Costs5A4C6
$verage Total Costs5ATC6
$TC)$"C7$#C
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A$erage and 2arginal Co!t!
2arginal Co!t
%arginal cost 52C6 ea!ure! the increa!e in total
co!t that ari!e! fro an e,tra unit of production#
2arginal co!t help! an!wer the following "ue!tion:
How uch doe! it co!t to produce an additional unit of
output?
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A$erage and 2arginal Co!t
#
(change in total cost)
(change in quantity)
TC
MC Q
= =
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Co!t Cur$e! and TheirShape!
2arginal co!t ri!e! with the aount ofoutput produced#
Thi! re3ect! the property of diini!hing
arginal product#
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Co!t Cur$e! and TheirShape!
The a$erage total*co!t cur$e i! 0*!haped#
At $ery low le$el! of output a$eragetotal co!t i! high .ecau!e ',ed co!ti! !pread o$er only a few unit!#
A$erage total co!t decline! a! output
increa!e!#
A$erage total co!t !tart! ri!ing.ecau!e a$erage $aria.le co!t ri!e!
!u.!tantially#
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Co!t Cur$e! and TheirShape!
The .otto of the 0*!haped ATC
cur$e occur! at the "uantity that
inii8e! a$erage total co!t# Thi!
"uantity i! !oetie! called the
e9cient !cale of the 'r#
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Typical Co!t Cur$e!
-t i! now tie to e,aine the
relation!hip! that e,i!t .etween the
dierent ea!ure! of co!t#
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Typical Co!t Cur$e!
Three -portant &ropertie! of Co!t
Cur$e!
2arginal co!t e$entually ri!e! with the
"uantity of output#
The a$erage*total*co!t cur$e i! 0*!haped#
The arginal*co!t cur$e cro!!e! the
a$era e*total*co!t cur$e at the
COSTS -1 THE SHORT R01 A1/ -1 THE
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COSTS -1 THE SHORT R01 A1/ -1 THELO1; R01
For any 'r!% the di$i!ion of total co!t!.etween ',ed and $aria.le co!t! depend!on the tie hori8on .eing con!idered# -n the !hort run% !oe co!t! are ',ed#
-n the long run% all',ed co!t! .ecoe $aria.le co!t!#
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Econoie! and /i!econoie! of
Scale
&conomies o scale refer to the propertywhere.y long*run a$erage total co!t fall! a!the "uantity of output increa!e!#
Constant returns to scale refer! to theproperty where.y long*run a$erage totalco!t !tay! the !ae a! the "uantity ofoutput increa!e!#
!iseconomies o scalerefer to the propertywhere.y long*run a$erage total co!t ri!e!a! the "uantity of output increa!e!#
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