Ch.

8 Outline Cost is created because resources are scarceopportunity cost = economic cost = value of a resource at it's best alternative use Explicit Costmoney spent to create a product Implicit CostHow much the resource could be worth at it's best alternative Normal Profitwhat you would make doing something elsecost of doing buisness Economic Costtotal cost including Explicit and Implicit costs Economic Profit = total revenue minus economic cost Pure Profit is the money left over Short run is changes that don't require a change in plant capacity (more workers, more resources, etc.) Long run = changes in plant capacity (size of building, number of machines in building) Cost of specific output = price of resources and amount of resources necessary Total Product = total quantity of product Marginal Product = Extra output caused by adding a unit of resource (MP = Change in TP/Change in resource) Average Product = output per unit of labor input (AP = TP/Units of Labor) Law of Diminishing Returns means that all things equal and stable, marginal product will decline after a certain point if labor is continually added, provided capacity does not change COSTS Fixed Cost is costs that must be paid regardless of output (Rent, interest, etc.) Variable Cost are costs associated with the level of output (resources, transportation, labor, etc.) Total Cost is sum of fixed and variable costs Average Fixed Cost (AFC) is found by dividing total fixed cost by output Average Variable Cost (AVC) is found by dividing total variable cost by output Average Total Cost (ATC) is found by dividing total cost by output Average costs are good for comparing things by unit Marginal Costall the cost of producing the last unit (what can be saved by not producing that last unit) and measures the change in cost per unit Marginal Revenueamount earned per unit Marginal Cost = cost of a worker divided by his marginal product MC Curve intersects AVC and ATC curves at their minimum When MC exceeds ATC, ATC rises and vice versa. MC and Fixed Cost do not interact COST CURVES Changes in Resource Price or technology cause cost curves to shift AVC and MC curves don't shift because they're based on variable prices If price of variable inputs rise, AVC, ATC, and MC would rise but not AFC because fixed costs haven't changed Long Run ATC curves are made of short-run ATC curves intersecting The curve is also known as a firms planning curve The U shape of the long run ATC curve is not the result of rising resource prices or law of deminishing returns LoDR only applies to situations in which productive resource or input is held constant

and under Long run, everything is variable Economies of scale = economies of mass production which explain the downsloaping part of ATC curve (Plant size goes up, leads to lower average cost of production for a time) Labor Specialization Increasing plant size leads to more workers which leads to increased specialization. Specialization eliminates opportunity cost of switching tasks and makes the process more efficient Managerial Specialization managers who can handle more people are underused in small factoriesthey can be used more efficiently in larger ones, as well as have specialists that can work to their advantage Efficient Capital Allows large firms to use the best capital and only large scale producers can afford them so a larger firm means a better use of capital Diseconomies of Scale Caused by inefficiency and difficulty of running larger firms one person cannot contain all the knowledge so things must be relayed and this is inefficient less knowledge is necessary to maximize output of a small firm Management Heirarchies lead to beareaucratic red tape and uncoordinated decisions Decision making doesn't reflect consumer tastes/tech quickly enough Workers don't have an interaction with employers and feel alienated Diseconomies lead to for example, an increase of input of 10, for an output of 5 more Minimum efficient scale is the lowest level of output at which a firm can minimize long-run average costs Natural Monopoly is when average total cost is realized when only one firm controls the market Where economies of scale are few and disecon arrive quickly, consumer demand supports small producers (types of farming, etc.)