Economic Costs

Short-Run and Long-Run

Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
22 C HAPTE R

Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

Previous Next
Slide
End
Slide
The Costs of Production
Show
22 - 1
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIC COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Economic Costs or
Opportunity Costs
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Forgoing the
Long-Run Production
Costs
Economies and
opportunity to produce
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
alternative goods and
Key Terms

services
Explicit Costs
Previous Next
Slide
End
Show
Slide
Implicit Costs
22 - 2
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIC COSTS
Economic Costs Normal Profits
Treated as a cost
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production

Required to attract &

Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
retain resources
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Economic or Pure Profits
Key Terms

Economic Total
Previous Next Economic Cost
Slide Slide Profit Revenue
End
Show
22 - 3
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIC COSTS
Economic Costs
Short-Run and Long-Run Profits to an Profits to an
Short-Run Production
Relationships
Short-Run Production
Economist Accountant
Costs
Short-Run Costs T
Economic (opportunity) Costs

Graphically
Economic O
Productivity and Cost
Curves T
Profit A
Long-Run Production
Costs
Accounting
Economies and Implicit costs L Profit
Diseconomies of Scale
Minimum Efficient Scale
(including a
and Industry Structure
normal profit) R
Key Terms E
V
Explicit Accounting
E
Previous Next costs (explicit
Slide Slide Costs N
U costs only)
End
Show E
22 - 4
Copyright McGraw-Hill/Irwin, 2005
 SHORT RUN AND LONG RUN
Economic Costs
Short-Run and Long-Run
Accounting:
Short-Run Production
Relationships
Short-Run Production
Short and long run is based
Costs
Short-Run Costs
Graphically
upon annual chronology.
Productivity and Cost
Curves
Long-Run Production
Costs
Economics:
Economies and
Diseconomies of Scale
Minimum Efficient Scale
Short run has fixed plant
and Industry Structure
Key Terms
capacity size.
Previous
Slide
Next
Slide
Long run has variable plant
End
Show
capacity size.
22 - 5
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN PRODUCTION
Economic Costs
RELATIONSHIPS
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Total Product (TP)
Costs
Short-Run Costs
Graphically
Productivity and Cost
Marginal Product (MP)
Curves Change in Total Product
Long-Run Production
Costs Marginal Product =
Economies and Change in Labor Input
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
Average Product (AP)
Previous Next Total Product
Slide Slide
Average Product =
End Units of Labor
Show
22 - 6
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN PRODUCTION
Economic Costs
RELATIONSHIPS
Short-Run and Long-Run
Short-Run Production
Relationships
Law of Diminishing Returns
Total Product, TP
Short-Run Production
Costs
Short-Run Costs
Total Product
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Increasing
Economies and
Diseconomies of Scale Marginal
Average Product, AP, and

Quantity of Labor
Marginal Product, MP

Minimum Efficient Scale

and Industry Structure Returns
Key Terms

Previous Next Average

Slide Slide Product
End Marginal
Show
22 - 7 Quantity of Labor Product
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN PRODUCTION
Economic Costs
RELATIONSHIPS
Short-Run and Long-Run
Short-Run Production
Relationships
Law of Diminishing Returns
Total Product, TP
Short-Run Production
Costs
Short-Run Costs
Total Product
Graphically
Productivity and Cost
Curves
Long-Run Production Diminishing
Costs
Economies and
Diseconomies of Scale
Marginal
Average Product, AP, and

Quantity of Labor Returns

Marginal Product, MP

Minimum Efficient Scale

and Industry Structure
Key Terms

Previous Next Average

Slide Slide Product
End Marginal
Show
22 - 8 Quantity of Labor Product
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN PRODUCTION
Economic Costs
RELATIONSHIPS
Short-Run and Long-Run
Short-Run Production
Relationships
Law of Diminishing Returns
Total Product, TP
Short-Run Production
Costs
Short-Run Costs
Total Product
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Negative
Economies and
Diseconomies of Scale Marginal
Average Product, AP, and

Quantity of Labor
Marginal Product, MP

Minimum Efficient Scale

and Industry Structure Returns
Key Terms

Previous Next Average

Slide Slide Product
End Marginal
Show
22 - 9 Quantity of Labor Product
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN PRODUCTION COSTS

Economic Costs
Fixed Costs
Total Fixed Costs
Short-Run and Long-Run
Short-Run Production
Relationships

Total Fixed Costs

Average Fixed Costs =
Short-Run Production
Costs
Short-Run Costs
Graphically Quantity
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
Variable Costs
and Industry Structure
Key Terms
Total Variable Costs
Total Variable Costs
Previous
Slide
Next
Slide
Average Variable Costs = Quantity
End
Show
22 - 10
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN PRODUCTION COSTS

Economic Costs
Total Cost
Total Fixed and Variable Costs
Short-Run and Long-Run
Short-Run Production
Relationships

Total Costs
Average Total Cost =
Short-Run Production
Costs
Short-Run Costs
Graphically Quantity
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
Marginal Cost
and Industry Structure
Key Terms
Total Variable Costs
Change in Total Costs
Marginal Cost =
Previous Next

Change in Quantity
Slide Slide
End
Show
22 - 11
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN PRODUCTION COSTS
Summary of Definitions
Total Fixed Costs = TFC
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Total Variable Costs = TVC
Total Costs = TC
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Average Fixed Costs = AFC
Minimum Efficient Scale
and Industry Structure
Key Terms Average Variable Costs = AVC
Previous
Slide
Next
Slide
Average Total Costs = ATC
End
Show Marginal Cost = MC
22 - 12
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN COSTS GRAPHICALLY
TC
Economic Costs
Short-Run and Long-Run Combining TVC
Short-Run Production
Relationships
Short-Run Production
With TFC to get TVC
Costs
Total Cost Fixed Cost
Costs (dollars)
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale

Total Variable Cost

Minimum Efficient Scale
and Industry Structure

Cost
Key Terms

Previous Next
TFC
Slide Slide
End Quantity
Show
22 - 13
Copyright McGraw-Hill/Irwin, 2005
 SHORT-RUN COSTS GRAPHICALLY

Economic Costs MC
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Plotting Average and
Costs

Marginal Costs
Costs (dollars)
Short-Run Costs
Graphically ATC
Productivity and Cost
Curves
Long-Run Production
AVC
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

Previous Next
AFC
Slide Slide
End Quantity
Show
22 - 14
Copyright McGraw-Hill/Irwin, 2005
 PRODUCTIVITY AND COST CURVES

Average product and

marginal product
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
AP
Productivity and Cost
Curves
MP
Long-Run Production
Costs Quantity of labor
Economies and
Diseconomies of Scale MC
Costs (dollars)

Minimum Efficient Scale

and Industry Structure AVC
Key Terms

Previous Next
Slide Slide
End
Show
22 - 15 Quantity of output
Copyright McGraw-Hill/Irwin, 2005
 LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
For every plant capacity
Short-Run Production
Relationships
Short-Run Production
Costs
size...
Short-Run Costs
Graphically
Productivity and Cost
there is a short-run ATC
curve.
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms
All such plant capacities
Previous Next
can be plotted.
Slide Slide
End
Show
22 - 16
Copyright McGraw-Hill/Irwin, 2005
 LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Unit Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

Previous Next
Slide Slide
End
Output
Show
22 - 17
Copyright McGraw-Hill/Irwin, 2005
 LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Unit Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

Previous Next
Slide Slide
End
Output
Show
22 - 18
Copyright McGraw-Hill/Irwin, 2005
 LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
The long-run ATC just envelopes
Short-Run Production
Costs all of the short-run ATC curves.
Unit Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

Previous Next
Slide Slide
End
Output
Show
22 - 19
Copyright McGraw-Hill/Irwin, 2005
 LONG-RUN PRODUCTION COSTS
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Unit Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
long-run ATC
Key Terms

Previous Next
Slide Slide
End
Output
Show
22 - 20
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIES AND
Economic Costs
DISECONOMIES OF SCALE
Short-Run and Long-Run
Short-Run Production
Relationships
Labor Specialization
Short-Run Production
Costs
Short-Run Costs
Managerial
Graphically
Productivity and Cost
Curves
Long-Run Production
Specialization
Costs
Economies and
Diseconomies of Scale
Efficient Capital
Other Factors
Minimum Efficient Scale
and Industry Structure
Key Terms

Previous Next
Diseconomies of Scale
Slide Slide
Constant Returns to Scale
graphically presented...
End
Show
22 - 21
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIES AND
Economic Costs
DISECONOMIES OF SCALE
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Economies
Short-Run Costs of scale
Graphically
Unit Costs

Productivity and Cost

Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

long-run ATC
Previous Next
Slide Slide
End
Show Output
22 - 22
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIES AND
Economic Costs
DISECONOMIES OF SCALE
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Economies Constant returns
Short-Run Costs of scale to scale
Graphically
Unit Costs

Productivity and Cost

Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

long-run ATC
Previous Next
Slide Slide
End
Show Output
22 - 23
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIES AND
Economic Costs
DISECONOMIES OF SCALE
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Economies Constant returns Diseconomies
Short-Run Costs of scale to scale of scale
Graphically
Unit Costs

Productivity and Cost

Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

long-run ATC
Previous Next
Slide Slide
End
Show Output
22 - 24
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIES AND
Economic Costs
DISECONOMIES OF SCALE
Short-Run and Long-Run
Short-Run Production

Where extensive
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically
economies of
Unit Costs

Productivity and Cost

Curves
Long-Run Production
Costs
Economies and
scale exist
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

long-run ATC
Previous Next
Slide Slide
End
Show Output
22 - 25
Copyright McGraw-Hill/Irwin, 2005
 ECONOMIES AND
Economic Costs
DISECONOMIES OF SCALE
Short-Run and Long-Run
Short-Run Production
Relationships
Short-Run Production
Costs
Short-Run Costs
Graphically Where economies
Unit Costs

Productivity and Cost

Curves
Long-Run Production
of scale are
Costs
Economies and
Diseconomies of Scale
quickly exhausted
Minimum Efficient Scale
and Industry Structure
Key Terms

long-run ATC
Previous Next
Slide Slide
End
Show Output
22 - 26
Copyright McGraw-Hill/Irwin, 2005
 MINIMUM EFFICIENT SCALE
AND INDUSTRY STRUCTURE
Economic Costs
Short-Run and Long-Run
Short-Run Production
Minimum Efficient Scale -
Relationships
Short-Run Production
Costs
MES
Short-Run Costs
Graphically Natural Monopoly
Productivity and Cost
Curves
Long-Run Production
Applications & Illustrations
Costs
Economies and Rising Cost of Insurance and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Security
Key Terms
Successful Start-Up Firms
Previous Next
The Verson Stamping Machine
Slide
End
Slide
The Daily Newspaper
Show
22 - 27
Aircraft and Concrete Plants
Copyright McGraw-Hill/Irwin, 2005
economic (opportunity) cost variable costs
explicit costs total cost
implicit costs average fixed cost (AFC)
normal profit average variable cost
economic profit (AVC)
short run average total cost (ATC)
long run marginal cost (MC)
total product (TP) economies of scale
marginal product (MP) diseconomies of scale
average product (AP) constant returns to scale
law of diminishing returns minimum efficient scale
fixed costs natural monopoly
Copyright McGraw-Hill/Irwin, 2005 BACK END
 NEXT:
Economic Costs
Short-Run and Long-Run
Short-Run Production
Relationships
Pure Competition
Short-Run Production
Costs
Short-Run Costs
Graphically
Productivity and Cost
Curves
Long-Run Production
Costs
Economies and
Diseconomies of Scale
Minimum Efficient Scale
and Industry Structure
Key Terms

Previous Next
Slide Slide
End
Show
Chapter 23
22 - 29
Copyright McGraw-Hill/Irwin, 2005