Cost of Production

Constant Cost Model for Imperfect Competition

- Assume increasing costs. - The long-run marginal cost does not change, marginal cost is a perfectly horizontal line

Variable costs

- Costs that increase with an increase in output and decrease with a decrease in output. TC- FC

Increasing Marginal Cost

- In the short run, a period of time in which one of the inputs to production if fixed, as production increases the marginal cost will increase. The marginal cost will increase because in the short run production process the law of diminishing marginal returns will occur.

Long run

- Period of time in which all costs are variable -Once the firm can eliminate all fixed costs it is considered to be in the long run

What happens to ATC and to MC when there is a change in FC or when there is a change in VC?

- When there is a change in FC, this does not change MC, but it does change ATC - When there is a change in VC, this changes both MC and ATC

What happens to ATC and MC if there is a per-unit subsidy placed on a product?

ATC goes down, MC goes down

What happens to ATC and MC if there is a Lump-subsidy placed on the product?

ATC goes down, MC no change

What happens to ATC and MC if there is a per-unit tax placed on a product?

ATC goes up, MC goes up

What happens to ATC and MC is there is a Lump-Sum Tax placed on the product?

ATC goes up, MC no change

Marginal Costs

Change in Total Costs/ Change in Output - if you keep adding variable resources (for example, labor) while one of the resources if fixed (for example, factory space) the cost of our marginal output will being to increase - The marginal cost increases before the average variable cost increases - The marginal cost can be increasing and still below the AVC and ATC

Average Fixed Costs

FC/Output -Gets smaller as the output increases

Total cost of production

Fixed cost + Variable Cost

Perfect competitor constant cost model

For a perfect competitor the long-run perfect competitive industry with constant cost is illustrated as an adjustment in industry supply that returns the long-run equilibrium cost to the same point

Economies of scale

Refers to the ability of a firm to alter the quantity of all inputs; therefore it is a long-run condition. No input is fixed. The firm can continue to decrease its per unit cost for a greater range of output in the long-run because it is not hampered by a fixed resource.

Returns os scale

Refers to the range of production where all inputs can be increased equally to maintain the lowest per unit cost. It is the bottom of the long-run average total cost curve that depicts a range of lowest cost per unit

Scale

Refers to the relationship of inputs used.

Average Variable Costs

VC/Output - The average variable cost increases before the average total cost increases - As long as the marginal cost is less than the average variable cost, the average variable cost is decreasing

The law of diminishing returns occurs

When there is one input that is constant

Cost advantages of labor vs capital

Whether it is more efficient to use labor or to use capital to achieve the lowest production costs depends on: - Cost of labor vs cost of capital -The output of labor vs output of capial

Short run

-As long as one of the resources remain fixed, the firm is considered to be in the short-run. -The cost of fixed resources is the fixed cost. - Short-run curves are u shaped because of diminishing marginal productivity which is a short-run occurrence because it is caused by the existence of a fixed resource

Fixed Costs

-Costs that a firm is committed to for a period of time even if the firm produces 0 products. -As the firm produces output, the total fixed costs remains constant.

What does MC do to ATC

-When MC goes down; ATC goes down. - When MC goes up; ATC will either go up or down

Diseconomies of scale

Refers to the range of production where the average cost per unit increases in the long-run despite the fact that inputs are not fixed. This occurs when the firm becomes so large that problems of efficiency occur

Average Total Costs

TC/ Output AVC + AFC - As long as the marginal cost is less than the average total cost, the average total cost is decreasing