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What are Costs?Firm ...................................... ...........................

(ECONOMIC COSTS) — ! " # $ ! % & ………………..(EXPLICIT) ! # + , "/ # " -# #* #- . $'" ………………..(IMPLICIT) .............................................................................................

0 1-…………………………….

0…………………

omic Pro!t is o"te ca##e$ %the &'re &ro!t . It keeps the entrepreneur in place and is the re

T O T L

R E * E N + Ecco' ti , Pro!t

cco' ti , Cost E-icit costs o #

P’MORSe PPETU#1

Costs of Production√All firms " # % #2 # # #$ ! ! 2 " *'2

" ,

ECONOM CI OC S

TS

Short Run—FIXED P !NT√ 2 2 ' . % "% 2 "3"4 $√Output $" ! ) . $" ! (adding) "5input -#*

# /√

Existing plant capacity can be used more or less intensivelyon" Run— !RI!$ E P !NT√Period of time 2 2 ' $ ! 2 ( ' ! * ' &'"

.√Enough time for existing firms to dissolve and exit the industry OR for new

firms to form and enter the industry.

Econo%icProfit

I%&'icit costsinc( Nor%)'

Profit

E*&'icitcosts

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TP

TP

10

See Ke !raphp. "20 in #e$t

/'a tit o" La0or

NoteMPIncreasing %arginal &eturns

'egati(e%arginal &eturns

)i*inishing%arginal &eturns

P

/'a tit o" La0or

P’MORSe PPETU#1

Short Run Re')tionshi&sTerms

(Tota# Pro$'ct) 1TP 1/ " 5&'&'" . !&'" ) . (Mar,i a# Pro$'ct) 1MP…………………………………………….

change in total produc t OR change in labor input ( 2era,e Pro$'ct) 1 P&'&'" 6' ! # # * . #2 "3"4 $ *equals total product OR

units o f labor

√ 7 $" ! ) . #' '√

+1, Units +-, +., +/,of ) Tot)' M)r"in)' !0er)"e

0)ri) 'eresource+') or,

Product Product∆ in - 2 ∆ in 1

Product- 2 1

!"

!"!

# #$% &$& '!$ !

' $$!

MP

)3 of Di%inishin" Returns

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P’MORSe PPETU#1P(.

Short Run Costs........................................... ! #) . # , &'" . ) + # ! &'"0 # &'"1 ' # + !.(# "/ "5 &'")-# # -# # 2 ".................................. ! ) . # , " 5 &'";$" ! ) . &* # ' $" ! ) . " 5 &'"

; -#law of di inishing returns……………………………………………………….. easier to control theset!pes of costs -#

(TOT L COSTS) ................................................ (PER +NIT OR *ER 3E COSTS)FC = ……………. *C = ………….. TC

= …………..or……………# (M R3IN L COSTS) ( &'" $" ! ) . 1# $" ! + # #…………………………

4 !FC ( $" !*' ) output $" ! ) . ! CP*+

!TC

MC .

4 MC intersects 3ith44 5hen MC 6 !TC7 !TC is

888√,hen -+ A/+0 A/+ is 111..

There is no re')tionshi& et3een 88)nd8((

on" Run re')tionshi&s % 2 22irm ( ' ! * ' 3nput . ! . % 2 2 ) #...................................... 2irm % 1# % 2 2 6' ! ! 2 ,3 +

.............................................

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T C

Eco omies o" sca#e ( 2 #)4 ……………………………………Co sta t Ret'r s to

5iseco omies o" Sca#e ( #2 #)4 …………………………………………

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