lecture 7: costs - george washington university › ... › lecture07_v4_final.pdflecture 7: costs...
TRANSCRIPT
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Lecture 7:Costs
October 13, 2015
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Overview
Course Administration
Why Policymakers Should Care About Costs
Accounting vs. Opportunity Costs
Sunk Costs
Cost Curves
Average and Marginal Costs
Short-Run and Long-Run Costs
Economies of Scale and Maybe Scope
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Course Administration
1. Problem Sets• Return problem set 5• Collect problem set 6• Problem set 7 posted
2. Midterm is next class• Bring a non-programmable calculator (not your cell phone!)• A pen or pencil• And nothing else
3. Final exam• Just requested room for December 15, 5:20 to 7:20
4. Any questions?
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Ripped from the Headlines
As a reminder, in two weeks, after the midterm
Afternoon
Finder Presenter
David Walrath Sharon Alvarez
Evening
Finder Presenter
Erika Solem Elizabeth KrevskyAnna Chuhkno Kevin Schoenberger
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Why Should Policymakers Care About Firm Costs?
• Supply costs determine economies of scale
• Input costs drive firm behavior
• Government policy can modify input costs
• Government is frequently a producer itself• how many fighter aircraft do we need to provide defense?• to sign up clients for the Affordable Care Act, which is better:
an improved website, or more personal help?• are the fixed costs of a new data tracking system worthwhile?
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Economic Costs vs. Accounting Costs
• Accounting cost ≡ direct cost
• Opportunity cost ≡ cost of what you give up by using aninput
• Perhaps most easily thought of as next best opportunity forfunds
• Give an opportunity cost example!• What’s the opportunity cost of holding cash?
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Defining Sunk Costs
• Firm has some fixed costs
• If the firm went bankrupt, some of those costs could berecovered
• The non-recoverable part of the fixed costs is called “sunk” –or sunk costs
• Examples?
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Now that the Costs are Sunk
• When costs are sunk, they should not enter into futurebusiness decisions
• Making decisions based on sunk costs is known as the “sunkcost fallacy”
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Waterworld and Sunk CostsOr Iraq/Afghanistan Invasion and Sunk Costs, If You Prefer
Costs Ex. Profit
Mo. Ex. Rev. Total Sunk Addt’l Continue No Prod.
June 150 -100 -16 -84 50 -16
Sept. 150 -140 -100 -40 10 -100Dec. 150 -175 -140 -25 -35 -140
• June: Ex. Profit > 0, clearly should go ahead.
• Sept.: Ex. Profit still > 0.
• Dec.: Ex. Profit < 0. Halt production? No,because alternative is loss of 140.
Sunk costfallacy would compare profit of -25 to 0.a
aTwo good listens on this topics are a Freakonomics podcast and a PlanetMoney transcript/podcast.
![Page 10: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/10.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Waterworld and Sunk CostsOr Iraq/Afghanistan Invasion and Sunk Costs, If You Prefer
Costs Ex. Profit
Mo. Ex. Rev. Total Sunk Addt’l Continue No Prod.
June 150 -100 -16 -84 50 -16
Sept. 150 -140 -100 -40 10 -100Dec. 150 -175 -140 -25 -35 -140
• June: Ex. Profit > 0, clearly should go ahead.
• Sept.: Ex. Profit still > 0.
• Dec.: Ex. Profit < 0. Halt production? No,because alternative is loss of 140. Sunk costfallacy would compare profit of -25 to 0.a
aTwo good listens on this topics are a Freakonomics podcast and a PlanetMoney transcript/podcast.
![Page 11: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/11.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Waterworld and Sunk CostsOr Iraq/Afghanistan Invasion and Sunk Costs, If You Prefer
Costs Ex. Profit
Mo. Ex. Rev. Total Sunk Addt’l Continue No Prod.
June 150 -100 -16 -84 50 -16Sept. 150 -140 -100 -40 10 -100
Dec. 150 -175 -140 -25 -35 -140
• June: Ex. Profit > 0, clearly should go ahead.
• Sept.: Ex. Profit still > 0.
• Dec.: Ex. Profit < 0. Halt production? No,because alternative is loss of 140. Sunk costfallacy would compare profit of -25 to 0.a
aTwo good listens on this topics are a Freakonomics podcast and a PlanetMoney transcript/podcast.
![Page 12: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/12.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Waterworld and Sunk CostsOr Iraq/Afghanistan Invasion and Sunk Costs, If You Prefer
Costs Ex. Profit
Mo. Ex. Rev. Total Sunk Addt’l Continue No Prod.
June 150 -100 -16 -84 50 -16Sept. 150 -140 -100 -40 10 -100
Dec. 150 -175 -140 -25 -35 -140
• June: Ex. Profit > 0, clearly should go ahead.
• Sept.: Ex. Profit still > 0.
• Dec.: Ex. Profit < 0. Halt production? No,because alternative is loss of 140. Sunk costfallacy would compare profit of -25 to 0.a
aTwo good listens on this topics are a Freakonomics podcast and a PlanetMoney transcript/podcast.
![Page 13: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/13.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Waterworld and Sunk CostsOr Iraq/Afghanistan Invasion and Sunk Costs, If You Prefer
Costs Ex. Profit
Mo. Ex. Rev. Total Sunk Addt’l Continue No Prod.
June 150 -100 -16 -84 50 -16Sept. 150 -140 -100 -40 10 -100Dec. 150 -175 -140 -25 -35 -140
• June: Ex. Profit > 0, clearly should go ahead.
• Sept.: Ex. Profit still > 0.
• Dec.: Ex. Profit < 0. Halt production? No,because alternative is loss of 140. Sunk costfallacy would compare profit of -25 to 0.a
aTwo good listens on this topics are a Freakonomics podcast and a PlanetMoney transcript/podcast.
![Page 14: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/14.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Waterworld and Sunk CostsOr Iraq/Afghanistan Invasion and Sunk Costs, If You Prefer
Costs Ex. Profit
Mo. Ex. Rev. Total Sunk Addt’l Continue No Prod.
June 150 -100 -16 -84 50 -16Sept. 150 -140 -100 -40 10 -100Dec. 150 -175 -140 -25 -35 -140
• June: Ex. Profit > 0, clearly should go ahead.
• Sept.: Ex. Profit still > 0.
• Dec.: Ex. Profit < 0. Halt production? No,because alternative is loss of 140. Sunk costfallacy would compare profit of -25 to 0.a
aTwo good listens on this topics are a Freakonomics podcast and a PlanetMoney transcript/podcast.
![Page 15: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/15.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Types of Cost
• Fixed costs ≡ costs that do not depend on how much outputthe firm produces
• Variable costs ≡ costs that do vary with the firm’s output
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
What Determines Whether the Cost is Fixed or Variable?
Time Horizon
• Many things are fixed in the short run
• Nothing is fixed in the long run
Other Factors
• Active rental markets can turn fixed costs into variable costs
• Long-run labor contracts can make labor a fixed, rather thanvariable cost
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
What Determines Whether the Cost is Fixed or Variable?
Time Horizon
• Many things are fixed in the short run
• Nothing is fixed in the long run
Other Factors
• Active rental markets can turn fixed costs into variable costs
• Long-run labor contracts can make labor a fixed, rather thanvariable cost
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
3 Key Cost Curves
• Total cost – recall the expansion path!
• Fixed cost
• Variable cost
We know that TC = FC + VC .
Sketch them on the paper in front of you, starting with FC andVC .
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
3 Key Cost Curves
• Total cost – recall the expansion path!
• Fixed cost
• Variable cost
We know that TC = FC + VC .Sketch them on the paper in front of you, starting with FC andVC .
![Page 20: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/20.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing TC, FC and VCWhat Does the Total Cost Curve Look Like?
$
Q
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing TC, FC and VCWhat About the Variable Cost Curve?
TC$
Q
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing TC, FC and VCAnd the Fixed Cost Curve?
TC$
Q
VC
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing TC, FC and VCEveryone, Together
TC$
Q
VC
FC
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average Costs
Definitions
• Average total costs: AC = CQ
• Average fixed costs: AFC = FCQ
• Average variable costs: AVC = VCQ
What about the shapes?
• AFC
• AVC – remember the law of diminishing returns
• ATC
Note that because there are fixed costs, this must be the short run.
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average Costs
Definitions
• Average total costs: AC = CQ
• Average fixed costs: AFC = FCQ
• Average variable costs: AVC = VCQ
What about the shapes?
• AFC
• AVC – remember the law of diminishing returns
• ATC
Note that because there are fixed costs, this must be the short run.
![Page 26: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/26.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average Costs
Definitions
• Average total costs: AC = CQ
• Average fixed costs: AFC = FCQ
• Average variable costs: AVC = VCQ
What about the shapes?
• AFC
• AVC – remember the law of diminishing returns
• ATC
Note that because there are fixed costs, this must be the short run.
![Page 27: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/27.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average Costs
Definitions
• Average total costs: AC = CQ
• Average fixed costs: AFC = FCQ
• Average variable costs: AVC = VCQ
What about the shapes?
• AFC
• AVC – remember the law of diminishing returns
• ATC
Note that because there are fixed costs, this must be the short run.
![Page 28: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/28.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average Costs in PicturesWhat Does Average Fixed Cost Look Like?
$
Quantity
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average Costs in PicturesWhat About Average Variable Costs?
$
Quantity
AFC
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average Costs in PicturesAnd Average Total Cost?
$
Quantity
AVC
AFC
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average Costs in PicturesEveryone, Together
$
Quantity
ATC
AVC
AFC
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Marginal Cost
• Marginal cost ≡ additional cost of producing an additionalunit of output
• Without calculus, MC = ∆C∆Q , or the slope of the total cost
curve
• With calculus, MC = ∂C∂Q
• What is its shape?
![Page 33: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/33.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Marginal Cost
$
Quantity
MC
![Page 34: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/34.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average vs. Marginal Cost
AC =C
Q,
MC =∆C
∆Q=
(∂C
∂Q
)
• Both come from total cost
• When MC > AC , what happens to average cost as Qincreases?
increases
• When MC < AC , what happens to average cost as Qincreases? decreases
• → MC = AC → AC must be at a minimum
• → MC curve intersects AC curve at minimum
![Page 35: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/35.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average vs. Marginal Cost
AC =C
Q,
MC =∆C
∆Q=
(∂C
∂Q
)
• Both come from total cost
• When MC > AC , what happens to average cost as Qincreases? increases
• When MC < AC , what happens to average cost as Qincreases?
decreases
• → MC = AC → AC must be at a minimum
• → MC curve intersects AC curve at minimum
![Page 36: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/36.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average vs. Marginal Cost
AC =C
Q,
MC =∆C
∆Q=
(∂C
∂Q
)
• Both come from total cost
• When MC > AC , what happens to average cost as Qincreases? increases
• When MC < AC , what happens to average cost as Qincreases? decreases
• → MC = AC → AC must be at a minimum
• → MC curve intersects AC curve at minimum
![Page 37: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/37.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Average and Marginal Costs
$
Quantity
MC
ATC
AVC
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Three Types of Costs
Compare the long and short run for
• Total Costs
• Average Costs
• Marginal Costs
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Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Short Run and Long Run Expansion Paths
• Goal is to consider long-run expansion path
• Then short run expansion path
• Which factor – K or L – is generally fixed in the short run?
• What must be true about the cost of the optimal mix of Kand L in the short run relative to the long run?
• Never less than in the long run.
![Page 40: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/40.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Short Run and Long Run Expansion Paths
• Goal is to consider long-run expansion path
• Then short run expansion path
• Which factor – K or L – is generally fixed in the short run?
• What must be true about the cost of the optimal mix of Kand L in the short run relative to the long run?
• Never less than in the long run.
![Page 41: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/41.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Optimal Input Choices in the Short and Long RunFirm’s Isoquants. What (K , L) Does It Use to Produce?
L
K
Q= aQ= b
Q= c
![Page 42: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/42.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Optimal Input Choices in the Short and Long RunWith Isocost Curves
L
K
Q= aQ= b
Q= c
![Page 43: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/43.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Optimal Input Choices in the Short and Long RunLong-Run Optimal Choices and an Expansion Path. What’s Fixed in the Short Run?
L
K
Q= aQ= b
Q= c
![Page 44: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/44.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Optimal Input Choices in the Short and Long RunK Fixed. What are the optimal (K , L)?
L
K
K is fixed
![Page 45: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/45.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Optimal Input Choices in the Short and Long RunSR Optimal Bundles: Where are Isocosts?
L
K
K is fixedShort run expansion path
![Page 46: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/46.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Optimal Input Choices in the Short and Long RunTotal Costs Higher in Short Run
L
K
K is fixedShort run expansion path
![Page 47: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/47.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Optimal Input Choices in the Short and Long RunCompare Long and Short Run Expansion Paths
L
K
K is fixedShort run expansion path
K not fixedLong run expansion path
![Page 48: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/48.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Two Cost Curves: Which One is the Short-Run Curve?What Do You Think?
$
Q
![Page 49: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/49.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Two Cost Curves: Which One is the Short-Run Curve?Short Run Costs Are Always ≥ Long Run Costs
TCLR
$
Q
TCSR
![Page 50: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/50.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Short-Run vs Long-Run Average Total Costs
• Repeat the exercise we just did for a variety of levels of initialfixed costs
• What will always be true about the short-run total cost curverelative to the long-run total cost curve?
• The short run cost curve is always ≥ the long-run curve
• Recall – what is the shape of the average cost curve?
![Page 51: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/51.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Short- and Long-Run Average Total Cost CurvesLR Average Cost Curve. What About SR AC at K = a?
$
Quantity
ATCLR
![Page 52: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/52.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Short- and Long-Run Average Total Cost CurvesAt Another K?
$
Quantity
ATCLR
ATCSR, K=a
![Page 53: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/53.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Short- and Long-Run Average Total Cost CurvesAnd Another K?
$
Quantity
ATCLR
ATCSR, K=a
ATCSR, K=b
![Page 54: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/54.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Short- and Long-Run Average Total Cost CurvesSR Cost Curves in Envelope of LR Curve
$
Quantity
ATCLR
ATCSR, K=a
ATCSR, K=b ATCSR,
K=c
![Page 55: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/55.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Short Run vs. Long Run Marginal Costs
• Where does the long-run marginal cost curve intersect theaverage cost curve?
• This holds true for the short-run curves, too
![Page 56: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/56.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Short Run vs. Long Run Marginal Costs
• Where does the long-run marginal cost curve intersect theaverage cost curve?
• This holds true for the short-run curves, too
![Page 57: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/57.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Short-Run Marginal Cost CurvesWhere is SR MC, K = a?
$
Quantity
ATCLR
ATCSR, K=a
ATCSR, K=b ATCSR,
K=c
![Page 58: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/58.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Short-Run Marginal Cost CurvesWhere is SR MC, K = b?
$
Quantity
ATCLR
ATCSR, K=a
ATCSR, K=b ATCSR,
K=c
MCSR, K=b
![Page 59: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/59.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Short-Run Marginal Cost CurvesWhere is SR MC, K = c?
$
Quantity
ATCLR
ATCSR, K=a
ATCSR, K=b ATCSR,
K=c
MCSR, K=b MCSR,
K=a
![Page 60: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/60.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Drawing Short-Run Marginal Cost CurvesEveryone, Together
$
Quantity
ATCLR
ATCSR, K=a
ATCSR, K=b ATCSR,
K=c
MCSR, K=b
MCSR, K=cMCSR,
K=a
![Page 61: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/61.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
An In-Class Problem: Costs
Suppose a firm’s total cost curve is TC = 10Q2 + 6Q + 60, andMC = 20Q + 6.
1. Find an expressions for the firm’s
1.1 fixed cost1.2 variable cost1.3 average total cost1.4 average variable cost
2. Find the output level that minimizes average total cost.
3. Find the output level that minimizes average variable cost.
4. Is it possible for MCSR = 15Q + 6 to be short-run marginalcosts?
![Page 62: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/62.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Economies of Scale
Three types
• Economies of scale ≡ output increases more rapidly than totalcost
• Diseconomies of scale ≡ output increases more slowly thantotal cost
• Constant economies of scale ≡ total cost and output increaseas same rate
![Page 63: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/63.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Returns vs. Economies
Economies of scale vs. returns to scale
• Economies of scale are about total inputs and total outputs
• Returns to scale are about inputs
• Increasing returns to scale =⇒ economies of scale
• Economies of scale 6=⇒ returns to scale
![Page 64: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/64.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Economies of Scope
• Economies of scope ≡ firm produces multiple outputs morecheaply together than it would each individual output
• Diseconomies of scope ≡ firm produces multiple outputs at ahigher cost than it would if it produced each outputindividually
• Where do they come from?
• From sharing common inputs or knowledge
![Page 65: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/65.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Economies of Scope
• Economies of scope ≡ firm produces multiple outputs morecheaply together than it would each individual output
• Diseconomies of scope ≡ firm produces multiple outputs at ahigher cost than it would if it produced each outputindividually
• Where do they come from?
• From sharing common inputs or knowledge
![Page 66: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/66.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Recap of Today
• Opportunity Costs
• Sunk Costs
• Cost Curves: Total Cost = Fixed Cost + Variable Cost
• Average Cost and Marginal Cost
• Short Run and Long Run Costs
• Economies of Scale (and maybe Scope)
![Page 67: Lecture 7: Costs - George Washington University › ... › lecture07_v4_final.pdfLecture 7: Costs October 13, 2015 AdminPolicymakersOpp. CostsSunk CostsCost CurvesAC and MCSR and](https://reader033.vdocument.in/reader033/viewer/2022060402/5f0e52767e708231d43eae17/html5/thumbnails/67.jpg)
Admin Policymakers Opp. Costs Sunk Costs Cost Curves AC and MC SR and LR Economies
Next Class
• Turn in Problem Set 7
• Midterm