5 firm behaviour and the organization of industry
TRANSCRIPT
5
FIRM BEHAVIOUR AND THE ORGANIZATION OF INDUSTRY
Copyright © 2006 Thomson Learning
1313The Costs of Production
Figure 1 Economic versus Accountants
Copyright © 2004 South-Western
Revenue
Totalopportunitycosts
How an EconomistViews a Firm
How an AccountantViews a Firm
Revenue
Economicprofit
Implicitcosts
Explicitcosts
Explicitcosts
Accountingprofit
Table 1 A Production Function and Total Cost: Hungry Horace’s Pizza Factory
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Figure 2 Hungry Horace’s Production Function
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Quantity ofOutput
(pizzasper hour)
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
Number of Workers Hired0 1 2 3 4 5
Production function
Table 1 A Production Function and Total Cost: Hungry Helen’s Cookie Factory
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Figure 3 Hungry Horace’s Total Cost Curve
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TotalCost
€ 80
70
60
50
40
30
20
10
Quantityof Output
(pizzas per hour)
0 10 20 30 15013011090705040 1401201008060
Total-costcurve
Table 2 The Various Measures of Cost: Thirsty Virgil’s Lemonade Stand
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Table 2 The Various Measures of Cost: Thirsty Thelma’s Lemonade Stand
Copyright©2004 South-Western
Copyright © 2006 Thomson Learning
Marginal Cost Thirsty Virgil’s Lemonade Stand
Quantity Total Cost
Marginal Cost
Quantity Total Cost
Marginal Cost
0 €3.00 — 1 3.30 €0.30 6 €7.80 €1.30 2 3.80 0.50 7 9.30 1.50 3 4.50 0.70 8 11.00 1.70 4 5.40 0.90 9 12.90 1.90 5 6.50 1.10 10 15.00 2.10
Figure 4 Thirsty Virgil’s Total Cost Curve
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Total Cost
€15.00
14.00
13.00
12.00
11.00
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
Quantityof Output
(glasses of lemonade per hour)
0 1 432 765 98 10
Total-cost curve
Figure 5 Thirsty Virgil’s Average Cost and Marginal Cost Curves
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Costs
€ 3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
Quantityof Output
(glasses of lemonade per hour)
0 1 432 765 98 10
MC
ATC
AVC
AFC
Figure 5 Thirsty Virgil’s Average-Cost and Marginal-Cost Curves
Copyright © 2004 South-Western
Costs
€ 3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
Quantityof Output
(glasses of lemonade per hour)
0 1 432 765 98 10
MC
Figure 5 Thirsty Virgil’s Average Cost and Marginal Cost Curves
Copyright © 2004 South-Western
Costs
€ 3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
Quantityof Output
(glasses of lemonade per hour)
0 1 432 765 98 10
ATC
Figure 5 Thirsty Virgil’s Average Cost and Marginal Cost Curves
Copyright © 2004 South-Western
Costs
€ 3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
Quantityof Output
(glasses of lemonade per hour)
0 1 432 765 98 10
ATC
MC
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Big Bob’s Cost Curves
Figure 6 Big Bob’s Cost Curves
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(a) Total Cost Curve
€18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
Quantity of Output (bagels per hour)
TC
42 6 8 141210
2.00
TotalCost
0
Figure 6 Big Bob’s Cost Curves
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(b) Marginal and Average Cost Curves
Quantity of Output (bagels per hour)
Costs
€ 3.00
2.50
2.00
1.50
1.00
0.50
0 42 6 8 141210
MC
ATCAVC
AFC
Figure 7 Average Total Cost in the Short and Long Run
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Quantity ofCars per Day
0
AverageTotalCost
1,200
€ 12,000
ATC in shortrun with
small factory
ATC in shortrun with
medium factory
ATC in shortrun with
large factory
ATC in long run
Figure 7 Average Total Cost in the Short and Long Run
Copyright © 2004 South-Western
Quantity ofCars per Day
0
AverageTotalCost
1,200
€ 12,000
1,000
10,000
Economiesof
scale
ATC in shortrun with
small factory
ATC in shortrun with
medium factory
ATC in shortrun with
large factory ATC in long run
Diseconomiesof
scale
Constantreturns to
scale