Economic vs.Accounting Cost

Short-Run vs.Long-Run Decisions

Opportunity Cost

8 Behind the Supply Curve:Inputs and Costs

Total Product Curve

Number of Workers

Outp

ut

per

min

ute

2 4 6 8 10

50

100

150

200

250

300

350

400

Increasing productivity:

specialization

Decreasing productivity: diminishing

returns

1 2 3 4 5 6 7

No. of workers

Marg

inal Pro

du

ct

10

20

30

40

50

60

70

80

90

1

2

3

0

4

0

65

150

220

270

TotalProduct

MarginalProduct

5 295

Marginal Product Curve

0

65

150

220

270

Output

0

1

2

3

4

Labor

$15

$15

$15

$15

$15

FixedCost

IngredCost

LaborCost

295 5 $15

TotalCost

Total Cost Curve

2¢/cookie$7/hour

0

65

150

220

270

Output

295

TotalCost

$15.00

$23.30

$32.00

$40.40

$48.40

$55.90Number of cookies

Cost

($)

80 160 240 320 400

10

20

30

40

50

60

70

80

Total Cost Curve

Number of cookies

Cost

($)

80 160 240 320 400

10

20

30

40

50

60

70

80

Short-Run Total Cost Curve

Diminishing returns:costs increase more

rapidly

Fixed cost

Variable cost

Total cost

Output

Cost

($

)

2 4 6 8 10

20

40

60

80

100

120

140

160Total cost

Calculating Average (AC) & Marginal (MC) Cost

4448

84

101

2 Units

MC =

AC =

8 Units

MC =

AC =

0

65

150

220

270

Output ATC AVC MC

295

TotalCost

$15.00

$23.30

$32.00

$40.40

$48.40

$55.90

Marginal and Average Costs

Cookies

Aver

/ M

arg

Cost

($

)

80 160 240 320 400

.10

.12

.14

.16

.18

.20

.22

.24

.26

.28

.30

Marginal and Average Cost Curves

160 320 480 640 800 960

.10

.20

.30

.40

ATC(2 ovens)

ATC(4 ovens)

ATC(6 ovens) ATC

(8 ovens)

Short-run and Long-run Average Costs In the long run, the firm can adjust capacity.

Output

Cost

($

)

4 8 12 16 20

5

10

15

20

25

30

35

40

Short-run and Long-run Average Costs

Indivisible inputs:

minimum level of fixed costs.

Economies of scale• specialization

• indivisible inputs• more productive

equip.• buying power

Minimum efficient

scale

Long-Run Cost Curves: Military Hospitals

Inpatient Units

$0

$100

$200

$300

$400

$500

$600

$700

0 10,000 20,000

Admissions

Cos

t per

Adm

Ancillary Services

$0

$2

$4

$6

$8

$10

$12

$14

0 500,000 1,000,000

Outpatient Visits

Cos

t per

Vis

it

Pharmacy 47%

Anesthesiology14%

Pathology 14%

Radiology 10%

Intensive Care 6%