Economic vs. Accounting Cost Short-Run vs. Long-Run Decisions Opportunity Cost 8 Behind the Supply...
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Economic vs.Accounting Cost
Short-Run vs.Long-Run Decisions
Opportunity Cost
8 Behind the Supply Curve:Inputs and Costs
Total Product Curve
Number of Workers
Outp
ut
per
min
ute
2 4 6 8 10
50
100
150
200
250
300
350
400
Increasing productivity:
specialization
Decreasing productivity: diminishing
returns
1 2 3 4 5 6 7
No. of workers
Marg
inal Pro
du
ct
10
20
30
40
50
60
70
80
90
1
2
3
0
4
0
65
150
220
270
TotalProduct
MarginalProduct
5 295
Marginal Product Curve
0
65
150
220
270
Output
0
1
2
3
4
Labor
$15
$15
$15
$15
$15
FixedCost
IngredCost
LaborCost
295 5 $15
TotalCost
Total Cost Curve
2¢/cookie$7/hour
0
65
150
220
270
Output
295
TotalCost
$15.00
$23.30
$32.00
$40.40
$48.40
$55.90Number of cookies
Cost
($)
80 160 240 320 400
10
20
30
40
50
60
70
80
Total Cost Curve
Number of cookies
Cost
($)
80 160 240 320 400
10
20
30
40
50
60
70
80
Short-Run Total Cost Curve
Diminishing returns:costs increase more
rapidly
Fixed cost
Variable cost
Total cost
Output
Cost
($
)
2 4 6 8 10
20
40
60
80
100
120
140
160Total cost
Calculating Average (AC) & Marginal (MC) Cost
4448
84
101
2 Units
MC =
AC =
8 Units
MC =
AC =
0
65
150
220
270
Output ATC AVC MC
295
TotalCost
$15.00
$23.30
$32.00
$40.40
$48.40
$55.90
Marginal and Average Costs
Cookies
Aver
/ M
arg
Cost
($
)
80 160 240 320 400
.10
.12
.14
.16
.18
.20
.22
.24
.26
.28
.30
Marginal and Average Cost Curves
160 320 480 640 800 960
.10
.20
.30
.40
ATC(2 ovens)
ATC(4 ovens)
ATC(6 ovens) ATC
(8 ovens)
Short-run and Long-run Average Costs In the long run, the firm can adjust capacity.
Output
Cost
($
)
4 8 12 16 20
5
10
15
20
25
30
35
40
Short-run and Long-run Average Costs
Indivisible inputs:
minimum level of fixed costs.
Economies of scale• specialization
• indivisible inputs• more productive
equip.• buying power
Minimum efficient
scale
Long-Run Cost Curves: Military Hospitals
Inpatient Units
$0
$100
$200
$300
$400
$500
$600
$700
0 10,000 20,000
Admissions
Cos
t per
Adm
Ancillary Services
$0
$2
$4
$6
$8
$10
$12
$14
0 500,000 1,000,000
Outpatient Visits
Cos
t per
Vis
it
Pharmacy 47%
Anesthesiology14%
Pathology 14%
Radiology 10%
Intensive Care 6%