when economists examine firms over time they must define the short run and long run short run...
TRANSCRIPT
When economists examine firms over time they must define the
Short Run and Long Run• Short Run
– Only some inputs (e.g. labor) can be adjusted– Not enough time to adjust all inputs (such as
capital)
• Long Run– long enough time to adjust all inputs (capital as
well as labor)
Simple Illustration: Fixed and Variable Costs08_01
Variable costs: $600 per day
Fixed costs: $300 per day
Variable costs: $1,660 per day
Fixed costs: $300 per day
Total costs: $900 per day
Total costs: $1,960 per day
Five Moves per Day Ten Moves per Day
Costs at a Typical Firm (T8.1) 08_01T
Quantity(pianos moved Total Fixed Variable Average Average Average Marginal
per day) Costs Costs Costs Total Cost Fixed Cost Variable Cost(Q ) (TC ) (FC ) (VC ) (ATC ) (AFC ) Cost (AVC ) (MC )
0 300 300 01 450 300 150 450 300 150 1502 570 300 270 285 150 135 1203 670 300 370 223 100 123 1004 780 300 480 195 75 120 1105 900 300 600 180 60 120 1206 1,040 300 740 173 50 123 1407 1,200 300 900 171 43 128 1608 1,390 300 1,090 174 38 136 1909 1,640 300 1,340 182 33 149 250
10 1,960 300 1,660 196 30 166 32011 2,460 300 2,160 223 27 196 500
-- -- -- --
TC = FC + VC ATC = TCQ AFC =
FCQ
AVC = VCQ
Change in TC
Change in Q
Marginal Cost and the Marginal Product of Labor
• Note that marginal cost first declines and then increases for the example firm
• The explanation is that the marginal product of labor first increases before it decreases– in other words, diminishing returns to labor do
not set for a while
• A graph of the production function illustrates this very well
The production function and variable costs (T8.2)
08_02T
Labor Costs
Quantity Hours at $10 Wage
(pianos moved) of Work (variable costs)
0 0 0
1 15 150
2 27 270
3 37 370
4 48 480
5 60 600
6 74 740
7 90 900
8 109 1,090
9 134 1,340
10 166 1,660
11 216 2,160
and larger...
08_03
12
10
8
6
4
2
0 50 100 150 200 250HOURS OF WORK (L)
QUANTITY
Q is small here...
then gets larger...
but then starts to decline...
and continues to decline...
and so on.
Q L
Marginal product of labor =
Average Cost
• Average Total Cost – equals Total Cost/Quantity produced (TC/Q)– also called cost per unit
• Average variable cost (VC/Q)
• Average fixed cost (FC/Q)
08_04
3 4 5 6 7 8 9 10 11
100
200
300
400
500
DOLLARS
QUANTITY
0 1 2
Marginal cost (MC)
Average variable cost (AVC)
Average total cost (ATC)
Sketching cost curves
• MC curve should cut ATC and AVC curves at their lowest points
• ATC curve and AVC curve should get closer to each other as quantity increases
• for a flourish, add a little dip at the start of your marginal cost curve
Finding Total Costs, Total Revenue, and Profits
• Find profit maximizing level of production• Find total costs: TC = ATC times Q
– because ATC = TC/Q– ATC times Q is the area of a rectangle
• Find total revenue = P times Q– P times Q is also the area of a rectangle
• Profits (or loss) is the difference between in the two rectangles
08_07COST OR
PRICE
QUANTITY
MC
ATC
AVC
Quantity produced (Q)
This point tells us what the quantity produced is.
Market price (P)
Total revenue (P x Q)
Total costs (ATC x Q)
This point gives the average total costs for the quantity produced.
Profits
08_08 COST OR PRICE
QUANTITY
MC
ATC
AVC
Profit-maximizing quantity produced (Q)
Market price (P)
This point gives the average total costs for the quantity produced.
Total revenue (P x Q)
Total costs (ATC x Q)
This point tells us what the quantity produced is.
Loss
The Breakeven Point08_09
QUANTITY
MC
ATC
AVC
PRICE OR COST
QUANTITY
MC
ATC
AVC
PRICE OR COST
QUANTITY
MC
ATC
AVC
PRICE OR COST
P
P
QQ Q
P
Profits
Loss
Profits greater than zero (P > ATC)
Profits equal to zero, or breakeven (P = ATC)
Profits less than zero, or loss (P < ATC)
Shutdown Point08_10
QUANTITY
MC
ATC
AVC
PRICE OR COST
QUANTITY
MC
ATC
AVC
PRICE OR COST
QUANTITY
MC
ATC
AVC
PRICE OR COST
P
PP
Profits are negative but price is greater than average
variable costs: do not shut down. (P > AVC)
Shutdown Point (P = AVC)
Profits are negative and price is less than average variable costs: shut down.
(P < AVC)
Q Q Q
The Long Run
• Now the firm can adjust its capital
• What happens to the ATC curve?
08_11
3 4 5 6 7 8 9 10 11 12
1,000
2,000
3,000
4,000
5,000
DOLLARS
13QUANTITY
0 1 2
Old total costs (TC1)
New total costs (TC2)
New fixed costs (FC2)Old fixed costs (FC1)
New variable costs
Old variable costs
08_12
0 1 2 3 4 5 6 7 8 9 10 11 12
100
200
300
400
500
600
700
DOLLARS
13
QUANTITY
ATC2
ATC1
The Long Run Average Total Cost Curve
• Sketch a different ATC curve for each level of capital
• The long run ATC curve is the lowest ATC curve for each quantity produced
08_13
3 4 5 6 7 8 9 10 11 120
100
200
300
400
500
DOLLARS
13
QUANTITY
14 15 16
ATC1 ATC2ATC3 ATC4
ATC1 curve lowest
ATC2 curve lowest
ATC3 curve lowest
ATC4 curve lowest
Long-run average total cost curve
Economies and Diseconomies of Scale
08_14
QUANTITY QUANTITY
COST
QUANTITY
Economies of Scale Constant Returns to Scale Diseconomies of Scale
COSTCOST
Declining long-run
ATCFlat long-run
ATC
Increasing long-run
ATC
Warning: Diminishing Returns to Labor
and Increasing Returns to Scale can Occur at the Same Firm
• Returns to labor – the other factors ( e.g.
capital) are unchanged
• More teachers in one classroom
• Returns to scale– all factors change
– analogy with Gulliver
• Teachers and classrooms both increase