production and cost
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ECONOMICS: Principles and Applications 3eHALL & LIEBERMAN© 2005 Thomson Business and Professional Publishing
Production and Cost
Figure 1 The Firm and Its Environment
Figure 2 Forms of Business Organization
Percent of Firms
Corporations 20%
Sole Proprietorships
73%
Partnerships 7%
Percent of Total Sales
Sole Proprietorships 6%
Partnerships 4%
Corporations 90%
Figure 3 The Firm’s Production Function
Table 1 Short-Run Production at Spotless Car Wash
Figure 4 Total And Marginal Product
30
90
130
161
184196 Total Product
Q from hiring fourth worker
Q from hiring third worker
Q from hiring second worker
Q from hiring first worker
increasing marginal returns
diminishing marginal returns
Units of Output
Number of Workers62 3 4 51
Table 2 A Firm’s Costs
Table 3 Short-Run Costs for Spotless Car Wash
Figure 5 The Firm’s Total Cost Curves
TC
0
Dollars
135
195
255
315
375
$435
30 90 130 161
Units of Output
184 196
TFC
TFC
TVC
Figure 6 Average and Marginal Costs
MC
AVCATCAFC
Units of Output
Dollars
$4
3
2
1
30 90 130 161 1960
Table 4 Average and Marginal Test Scores
Table 5 Four Ways to Wash 196 Cars per Day
Table 6 Long-Run Costs for Spotless Car Wash
Figure 7 Long-Run Average Total Cost
LRATCATC1
Use 0 automated
lines
ATC3ATC0
C
BA
ATC2
D
E
175 196184
Dollars
1.00
2.00
3.00
$4.00
Units of Output
30 90 130 161 250 3000
Use 1 automated
lines
Use 2 automated
lines
Use 3 automated
lines
Figure 8 The Shape of LRATC
Units of Output
LRATC
Economies of Scale Constant Returns to
Scale
Diseconomies of Scale
Dollars
1.00
2.00
3.00
$4.00
130 1840
Figure 9 How LRATC Helps Explain Market Structure
(a) A Market with Many Small Firms
LRATCTypical Firm
DMarket
0
Dollars
Units per Month
80
$160
100,0001,000 3,000
F
E
Figure 9 How LRATC Helps Explain Market Structure
(b) A Natural Monopoly
DMarket
LRATCTypical Firm
Units per Month
100,0000
80
$160
Dollars
Figure 9 How LRATC Helps Explain Market Structure
(c) A Market with a Few Large Firms
E
H F
25,000
Units per Month
100,0000
80
$200
Dollars
DMarket
LRATCTypical Firm
Figure 9 How LRATC Helps Explain Market Structure
(d) A Market with Coexisting Small and Large Firms
E F
0
Dollars
Units per Month
80
$160
100,0001,000 10,000
LRATCTypical Firm
DMarket
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