University of Hawai‘i at MānoaDepartment of Economics

ECON 130 (003): Principles of Economics (Micro)

http://www2.hawaii.edu/~lindojGerard RussoLecture #16

Thursday, March 4, 2004

ANNOUNCEMENTSREVIEW SESSIONThursday, March 18, 2004, 4:30-5:30 PM

BIL 152

MID-TERM EXAMINATION #2Tuesday, March 30, 2004, 12:00-1:15 PM

BIL 152

LECTURE 16Three Stages of ProductionCost TheoryTotal CostAverage CostMarginal Cost

L

L

Q

Q/L

•

•

•

L0 L1 L2

TP

APL

MPL

STAGE III

THREE STAGES OF SHORT-RUN PRODUCTION

STAGE I

STAGE II

Production & Cost DataLabor:L

Output:Q

AP L= Q/L

MPL=

∆Q/∆L

Total Cost$

AverageCost,$/Q

Marginal Cost,$/Q

0 0 - - 0 0 0

1 1 1 1 50,000 50,000 50,000

2 3 1.5 2 100,000 33,333 25,000

3 6 2.0 3 150,000 25,000 16,666

Short-Run Cost$

Q

Total Variable Cost

Short-Run Cost$

Q

Total Variable Cost

A •

0

R1 R2

R3

Q1

TVC1

Q2 Q3

TVC3

TVC2 Average Variable Costis minimized here.

Short-Run Total Variable Cost$

Q

Total Variable Cost

A •B

•

0 QA

Average Variable Costis minimized here.

QB

Marginal Costis minimized here.

Q

Q

$

$/Q

R•T

•

TVC

AVC

MC

Total Cost = Total Fixed Cost + Total Variable Cost

TC = TFC + TVCTC – TFC = TVCTC - TVC = TFCTC/Q = TFC/Q + TVC/QATC = AFC + AVCATC – AFC = AVCATC – AVC = AFC

Q

Q

$

$/Q

TFC

AFC

Average Fixed CostCurve is a RectangularHyperbola.

Q

Q

$

$/Q

R•T

•

TVC

AVC

MCATC

TFC

TC

•

$/Q

Q

MC ATC

AVC

AFCA•

0

C•

B•

•E

•F•G

Q*

TC equals the area of rectangle 0CEQ*.TVC equals the area of rectangle 0BFQ*.TFC equals the area of rectangle 0AGQ* .

TFC equals the area of rectangle BCEF.

TC= ? ; TVC = ? ; TFC = ?$/Q

Q

MC ATC

AVC•

•

0

A•

E•

B

C

D

TC = ? TVC = ? TFC = ?$/Q

Q

MC ATC

AVC

AFCA•0

C•B•

•E•F

•GQ*

LECTURE 16 (cont.)Economies of Scale (EOS)Long-Run Costs

Scale EffectsLong-Run v. Short-RunEconomies of ScaleEconomies of ScopeLong Run Production Q = f ( K, L )

Economies of Scale (EOS):An Example: circle with radius

R

R

Area=¶R2

Circumference=2¶R

Short-Run Average Cost Curves$/Q

Q0

ATC1 ATC2

ATC5

ATC4ATC3

Short-Run Average Cost Curves$/Q

Q0

ATC1 ATC2

ATC5

ATC4ATC3

Long-Run Average Total Cost Curve$/Q

Q0

•

•

•

LRATCATC1

ATC2

ATC3

ATC4

•

Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS)

$/Q

Q0

LRATC

Economies of Scale Diseconomies of Scale

QMES

Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS)

$/Q

Q0

LRATC

QMES

Economies of ScaleIncreasing Returns to Scale

Neither Economies norDiseconomies of ScaleConstant Returns to Scale

Minimum Efficient Scale (MES)Minimum Optimal Scale (MOS)

$/Q

Q0

LRATC

QMES