chapter 7: the cost of production

relationship between increasing returns to scale and economies of scale

A firm's production process can exhibit constant returns to scale, but still have economies of scale as well. Of course, firms can enjoy both increasing returns to scale and economies of scale. Compare these two: increasing returns to scale: output more than doubles when the quantities of all inputs are doubled. Economies of scale: a doubling of output requires less than a doubling of cost. (cows and milk)

Average Total Cost (ATC)

A firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost.

what high marginal product tells us?

A high marginal product means that the labor requirement is low, as the marginal cost.

example 7.4 the effect of effluent fees on input choices

An effluent fee is a per-unit fee that the steel firm must pay for the effluent that goes into the river. When the firm is not charged for dumping its wastewater in a river, it chooses to produce a given output using 10,000 gallons of wastewater and 2000 machine-hours of capital at A. However, an effluent fee raises the cost of wastewater, shifts the isocost curve from FC to DE, and causes the firm to produce at B—a process that results in much less effluent.

long-run marginal cost curve (LMC)

Curve showing the change in long-run total cost as output is increased incrementally by 1 unit.

product transformation curve, slope

Curve showing the various combinations of two different outputs (products) that can be produced with a given set (fixed amount) of (production) inputs. The production transformation curves O1 and O2 are bowed out (or concave) because there are economies of scope in production. If curve O1 were a straight line, joint production would entail no gains (or losses). (concave because they enjoy advantages in production) Why does it have a negative slope? Because in order to get more of one output, the firm must give up some of the other output.

Solve the following examples

Which of the following is true of cost curves? A) The ATC curve goes through the minimum of the MC curve. B) The AVC curve goes through the minimum of the MC curve. C) The MC curve goes through the minimum of the ATC curve, to the left of the minimum of the AVC curve. D) The MC curve goes through the minimum of the AVC curve, to the right of the minimum of the ATC curve. E) The MC curve goes through the minimum of both the AVC curve and the ATC curve.

measuring economies of scale

Economies of scale are often measured in terms of a cost-output elasticity Ec. Ex is the percentage change in the cost of production resulting from a 1-percent increase in output. Ec = (ΔC/C)/ (Δq/q) Ec = (ΔC/Δq)/(C/q) = MC / AC Clearly, Ec is equal to 1 when marginal and average costs are equal. Then, costs increase proportionately with output, and there are neither economies nor diseconomies of scale (constant returns to scale would apply if input proportions were fixed). When there are economies of scale (when costs increase less than proportionately with output), marginal cost is less than average cost (both are declining) and Ec is less than 1. Finally, when there are diseconomies of scale, marginal cost is greater than average cost and Ec is greater than 1.

production with two outputs - economies of scope

Firm is likely to enjoy production or cost advantages when it produces two or more products (joint use of inputs or production facilities, joint marketing programs, or possibly the cost savings of a common administration).

long-run average and marginal cost

In the long run, the ability to change the amount of capital allows the firm to reduce costs. The most important determinant of the shape of the long -run average and marginal cost curves is the relationship between the scale of the firm's operation and the inputs that are required to minimize its costs.

the price of capital

In the long run, the firm can adjust the amount of capital it uses. We want to express capital expenditure as a flow, in dollars per year. We must amortize the expenditure by spreading it over the lifetime of the cfapital, we must also account for the forgone interest that the firm could have earned by investing the money elsewhere. As we have just seen, this is exactly what we do when we calculate the user cost of capital. The price of capital is its user cost, given by r=depreciation rate+ interest rate

Choosing Inputs

Isocost curves describe the combination of inputs to production that cost the same amount to the firm. Isocost curve C1 is tangent to isoquant q1 at A and shows that ouput q1 can be produced at minimum cost with labor input L1 and capital input K1. Other input combinations -l2, k2 and l3, c3 yield the same output but at higher cost.

choosing inputs

No combination of inputs can be puchased for expenditure Ca that will allow the firm to achive output q1. Isocost line Cb is the lowest isocost line that allows output q1 at point B gives us the cost-minimizing choice of inputs L and K, which can be read directly from diagram. Output q1 can be achieved with expenditure of Cc, but it is not the minimum cost. When the expenditure on all inputs increases, the slope of the isocost line doesn't change bcs the prices of the inputs have not changed. The intercept increases

average cost of production and returns of scale

With constant returns to scale, the average cost of production must be the same for all levels of output. Increasing returns to scale: a doubling of inputs leads to more than doubling of output. The average cost of production falls with output because a doubling of costs is associated with a more than twofold increase in output. When there is decreasing returns to scale, the average cost of production must be increasing with output. A constant average cost means a constant marginal cost.

sunk cost

a cost that has already been made and cannot be recovered. (bcs it cannot be recovered, it should not influence the firm's decisions)(example of specialized equipment that can be used onls what it was originaly designed,and cannot convert for alternative use - it has no alternative use, its opportunity cost is zero)(you give 500k euros to pay a house for 5mill, but new house is selling now for 5250000. they should choose 1st one bcs sunk cost is 500000 and it is already given so it should not affect the current decision) example is software company

accounting cost

actual expenses plus depreciation charges for capital equipment

user cost of capital

annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest. user cost of capital = economic depreciation + (interest rate)(value of capital) we can also express the user cost of capital as a rate per dollar of capital r = depreciation rate + interest rate r = i + d TC = w*L + r*K K = -w/r*L + r*K

rental rate

cost per year of renting one unit of capital. In competitive market, rental rate should be same as user cost. This competitive return is the user cost of capital. Capital that is purchased can be treated as though it were rented at a rental rate equal to the user cost of capital.

Fixed Cost (FC)

cost that does not vary with the level of output and that can be eliminated only by shutting down (plant maintenance, insurance, heat and electricity) It must be paid even if there is no output, example is pizzeria

Variable Cost (VC)

cost that varies as output varies (wages, salaries, raw materials), example is computer

economic cost

cost to a firm of utilizing economic resources in production (economists are concerned with the allocation of scarce resources, they want to be able to rearrange its resources to lower its costs and improve its profitability (all costs relevant to production + other resources that are less obvious, but equally important))

long-run average and marginal cost

When a firm is producing at an output at which the long-run average cost LAC is falling, the long-run marginal cost LMC is less than LAC. Conversely, when LAC is increasing, LMC is greater than LAC. The two curves intersect at A, where the LAC curve achieves its minimum.

inflexibility of short-run production

When a firm operates in the short run, its cost of production may not be minimized because of inflexibility in the use of capital inputs. The firm's long-run expansion path is the straight line from the origin that corresponds to the expansion path in the figure. Output is initially at level q1. In the short run, output q2 can be produced only by increasing labor from L1 to L3 because capital is fixed at K1. In the long run, the same output can be produced more cheaply by increasing labor from L1 to L2 and capital from K1 to K2.

the cost-minimizing response to an effluent fee

When the firm is not charged for dumping its wastewater in a river, it chooses to produce a given output using 10000 gallons of wastewater and 2000 machine-hours of capital at A. However, an effluent fee raises the cost of wastewater (x-axis), shifts the isocost curve from FC to DE, and causes the firm to produce at B-a process that results in much less effluent.

Average-Marginal Relationship

Whenever marginal cost lies below average cost, the average cost curve falls. Whenever marginal cost lies above average cost, the average cost curve rises. When average cost is at a minimum, the marginal cost equals average cost.

What happens to marginal cost, if marginal product of labor decreases?

Whenever the marginal product of labor decreases, the marginal cost of production increases, and vice versa.

expansion path

curve passing through points of tangency between a firm's isocost lines and its isoquants. As long as the use of both labor and capital increases with the output, the curve will be upward sloping. The expansion path is a straight line with a slope equal to ΔK/ΔL = MPl / MPk In (a), the expansion path (from the origin through points A, B, and C) illustrates the lowest-cost combinations of labor and capital that can be used to produce each level of output in the long run— i.e., when both inputs to production can be varied. In (b), the corresponding long-run total cost curve (from the origin through points D, E, and F) measures the least cost of producing each level of output

long-run average cost curve

curve relating average cost of production to output when all inputs, including capital, are variable. (s-shaped bcs of returns of scale, not because of diminishing returns to a factor of production).

short run average cost curve

curve relating average cost of production to output when level of capital is fixed.

input substitution when an input price changes

facing an isocost curve C1, the firm produces output q1 at point A using L1 units of labor and K1 units of capital. When the price of labor increases, the isocost curves become steeper. Output q1 is now produced at point B on isocost curve C2 by using L2 of labor and K2 units of capital.

Average Fixed Cost (AFC)

fixed cost divided by the level of output

isocost line

graph showing all possible combinations of labor and capital that can be purchased for a given total cost. TC = wL + rK equation for a straight line: K = C/r - (w/r)L isocost line has a slope of: ΔK/ΔL = -(w/r) which is ratio of wage rate to the rental cost of capital. It tells us that if the firm gave up a unit of labor (and recovered w dollars in cost) to buy w/r units of capital at a cost of r dollars per unit, its total cost of production would remain the same.

energy efficiency through capital substitution for labor

greater energy efficiency can be achieved if capital is substituted for energy. This is shown as a movement along isoquant q1 from point A to point B, with capital increasing from K1 to K2 and energy decreasing from E2 to E1 in response to a shift in the isocost curve from C0 to C1.

the cost-minimizing input choice

how to select inputs to produce a given output at minimum cost? we have two variable inputs: labor (measured in hours) and capital (measured in hours of use of machinery per year) the amount of labor and capital that firm wuses will depend on prices of inputs. we'll assume that because there are competitive markets for moth inputs, their prices are uneffected by what the firm does. In this case, the price of labor is imply the wage rate.

are costs fixed or variable over very short time horizon?

most costs are fixed

are costs fixed or variable over longer time period

most costs become variable

amortization

policy of treating a one-time expenditure as an annual cost spread out over some number of years (amortizing large capital expenditures and treating them as ongoing fixed costs can also simplify the economic analysis of a firm's operation.) As we will see, for example, treating capital expenditures this way can make it easier to understand the tradeoff that a firm faces in its use of labor versus capital. For simplicity, we will usually treat sunk costs in this way as we examine the firm's production decisions. When distinguishing sunk from fixed costs does become essential to the economic analysis, we will let you know.

Shapes of cost curves, picture 1

total cost TC is the vertical sum of fixed cost FC and variable cost VC difference between tc and vc is always 50 bcs of fc

Total Cost (TC)

total economic cost of production, consisting of fixed and variable costs

Average Variable Cost (AVC)

variable cost divided by the level of output

cost minimization with varying output levels

we determine The firm's cost-minimizing input quantities for each output level and then calculate the resulting cost. C = wL + rK In figure the lowest line represents a cost of 1000$, the middle line 2000$ and the highest line 3000$. You can see that each of the points A, B, and C is a point of tangency between an isocost curve and an isoquant. The expansion path points A, B and C, it illustrates the lowest cost combinations of labor and capital that can be used to produce each level of output in the long run - when both inputs to production can be varied The corresponding long-run total cost curve (from the origin through points D, E and F measures the least cost of producing each level of output).

solve this examples

1. A firm has a fixed production cost of $1000 and a constant marginal cost of $600 per unit. 1.What is the firm's total cost function? 2.What is the average cost function? 2. You manage a plant that mass produces engines. The production function is Q=5KL. Each machine rents for $5000 a week and wages are $3000 per week. Fixed cost are $100000. 1. Define the total cost function! 2. Define the average cost function! 3. Define the marginal cost function! 3. Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II. The marginal cost of a given level of output is the slope of the line that is tangent to the variable cost curve at that level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Solve the following examples:

1. Suppose that the price of labor (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100? 2. A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm A) is producing its current output level at the minimum cost. B) could reduce the cost of producing its current output level by employing more capital and less labor. C) could reduce the cost of producing its current output level by employing more labor and less capital. D) could increase its output at no extra cost by employing more capital and less labor. E) Both B and D are true.

3 reasons why it is likely that the average cost of production will begin to increase with output

1. at least in short run, factory space and machinery may make it more difficult for workers to do their jobs effictively. 2. managing a larger firm may become more complex and inefficient as the number of tasks increases. 3. The advantages of buying in bulk may have disappeared once a certain quantities are reached. At some point, available supplies of key inputs may be limitet, pushing their costs up.

3 reasons why as output increases, the firm's average cost of producing that output is likely to decline

1. if the firm operates on a larger scale, workers can specialize in the activities at which they are most productive. 2. scale can provide flexibility. By varying the combination of inputs utlized to produce the firm's output, managers can organize the production process more effectively. 3. the firm may be able to acquire some production inputs at a lower cost because it is buying them in large quantities and can therefore negotiate better prices. The mix of inputs might change with the scale of the firm's operation if managers take advantage of lower-cost inputs.

economic cost <,> or = opportunity cost

=

MRTS (marginal rate of technical substitution)

=w/r, slope of isoquant or MPl / MPk = w/r MPl/w = MPk/r if MPl goes down, L goes up, c goes down if MPk decreases, capital increases, labor decreases k = -w/r*L + TC/r MPl/w is the additional output that results from spending an additional dolar for labor. MPk/r is the additional output that results from spending an additional dollar for capital. Equation tells us that a cost-minimizing firm should choose its quantities of inputs so that the last dollar's worth of any input added to the production process yields the same amount of extra output.

diminishing marginal returns and marginal cost

Diminishing marginal returns means that the marginal product of labor declines as the quantity of labor employed increases. As the result, when there are diminishing marginal returns, marginal cost will increase as output increases.

determinants of short run cost

Diminishing marginal returns to labor occur when the marginal product of that labor is decreasing. If the marginal product of labor decreases as the amount of labor hired is increased (owing to diminishing returns), successively greater expenditures must be made to produce output at the higher rate. As the result, variable and total costs increase as the rate of output is increased. On the other hand, if the marginal product of labor decreases only slightly as the amount of labor is increased, costs will not rise so quickly when the rate of output is increased. The change in variable cost is the per-unit cost of extra labor w times the amount of extra labor needed to produce the extra output ΔL. Because ΔVC=WΔL, it follows that MC = ΔVC / ΔQ= WΔL/ΔQ the marginal product of labor MP is the change in output resulting from a 1-unit change in labor input, or Δq/ΔL. Therefore,, the extra labor needed to obtain an extra unit of output is ΔL/ΔQ = 1/MPl. As the result, MC = w/MPl Equation states that when there is only one variable input, the marginal cost is equal to the price of the input divided by its marginal product.

fixed versus sunk costs

Fixed costs are costs that are paid by a firm that is operating, regardless of the level of output it produces. Sunk costs are costs that have been incurred and cannot be recovered. Fixed costs affect the firm's decisions looking forward, Whereas sunk costs do not. Fixed costs might lead a firm to shut down if fc are high relative to revenue and cannot be reduced - eliminating those FC and earning zero profit might be better than incurring ongoing losses. Incurring a high sunk cost might later turn out to be a bad decision, but the expenditure is gone and cannot be recovered by shutting down. slides: Shutting down doesn't necessarily mean going out of business. Fixed costs can be avoided if the firm shuts down a plant or goes out of business. Sunk costs, on the other hand, are costs that have been incurred and cannot be recovered. When a firm's equipment is too specialized to be of use in any other industry, most if not all of this expenditure is sunk, i.e., cannot be recovered. Why distinguish between fixed and sunk costs? Because fixed costs affect the firm's decisions looking forward, whereas sunk costs do not. Fixed costs that are high relative to revenue and cannot be reduced might lead a firm to shut down—eliminating those fixed costs and earning zero profit might be better than incurring ongoing losses. Incurring a high sunk cost might later turn out to be a bad decision (for example, the unsuccessful development of a new product), but the expenditure is gone and cannot be recovered by shutting down. Of course a prospective sunk cost is different and, as we mentioned earlier, would certainly affect the firm's decisions looking forward.

reducing the use of energy

Greater energy efficiency can be achieved if capital is substituted for energy. This is shown as a movement along isoquant q1 from point A to point B, with capital increasing from K1 to K2 and energy decreasing from E2 to E1 in response to a shift in the isocost curve from C0 to C1. Technological change implies that the same output can be produced with smaller amounts of inputs. Here the isoquant labeled q1 shows combinations of energy and capital that will yield output q1 ; the tangency with the isocost line at point C occurs with energy and capital combinations E2 and K2 . Because of technological change the isoquant shifts inward, so the same output q1 can now be produced with less energy and capital, in this case at point D, with energy and capital combination E1 and K1 .

fixed or variable?

How do we know which costs are fixed and which are variable? Over a very short time horizon—say, a few months—most costs are fixed. Over such a short period, a firm is usually obligated to pay for contracted shipments of materials. Over a very long time horizon—say, ten years—nearly all costs are variable. Workers and managers can be laid off (or employment can be reduced by attrition), and much of the machinery can be sold off or not replaced as it becomes obsolete and is scrapped.

example 7.2 sunk, fixed, and variable costs: computers, software, and pizzas

It is important to understand the characteristics of production costs and to be able to identify which costs are fixed, which are variable, and which are sunk. Good examples include the personal computer industry (where most costs are variable), the computer software industry (where most costs are sunk), and the pizzeria business (where most costs are fixed). Because computers are very similar, competition is intense, and profitability depends on the ability to keep costs down. Most important are the cost of components and labor. A software firm will spend a large amount of money to develop a new application. The company can recoup its investment by selling as many copies of the program as possible. For the pizzeria, sunk costs are fairly low because equipment can be resold if the pizzeria goes out of business. Variable costs are low—mainly the ingredients for pizza and perhaps wages for a workers to produce and deliver pizzas.

Opportunity costs examples

Jane is deciding whether to study or work abroad. The costs of study are: tuition fee €5000, rent €4000, food €2000 and books €500. The costs of work are rent €6000, food €3500. Jane would also earn €25000in one year. What is the opportunity cost of studying abroad? Anja is deciding whether to enroll full-time study programme in economics or to work in a company OC p.l.c. Yearly tuition is € 2,000, while books cost an additional €500 per year. In OC p.l.c. her yearly wage would be €12,000. All other costs (rent, food) are identical for a student and a working person. What is the opportunity cost of schooling?

the average-marginal relationship

Marginal and average costs are another example of the average-marginal relationship described in Chapter 6 (with respect to marginal and average product). Because average total cost is the sum of average variable cost and average fixed cost and the AFC curve declines everywhere, the vertical distance between the ATC and AVC curves decreases as output increases.

The degree of economies of scope

Percentage of cost savings resulting when two or more products are produced jointly rather than individually. SC = (C(q1) + C(q2) + C(q1, q2))/ (C(q1,q2)) C(q1) represents the cost of producing only output q1, C(q2) represents the cost of producing only output q2, and C(q1,q2) the joint cost of producing both outputs. With economies of scope, the joint cost is less than the sum of the individual costs. Thus, SC is greater than 0. With diseconomies of scope, SC is negative. In general, the larger the value of SC, the greater the economies of scope.

shutting down

Shutting down doesn't necessarily mean going out of business. By reducing the output of that factory to zero, the company could eliminate the costs of raw materials and much of the labor, but it would still incur the fixed costs of paying the factory's managers, security guards, and ongoing maintenance. The only way to eliminate those fixed costs would be to close the doors, turn off the electricity, and perhaps even sell off or scrap the machinery.

energy efficiency through technological change

Technological change implies that the same output can be produced with smaller amounts of inputs. Here the isoquant labeled q1 shows combinations of energy and capital that will yield output q1; the tangency with the isocost line at point C occurs with energy and capital combinations E2 and K2. Because of technological change the isoquant shifts inward, so the same output q1 can now be produced with less energy and capital, in this case at point belos (D), with energy and capital combination E1 and K1.

example 7.1 choosing the location for a new lawschool building

The Northwestern University Law School has long been located in Chicago, along the shores of Lake Michigan. However, the main campus of the university is located in the suburb of Evanston. In the mid-1970s, the law school began planning the construction of a new building. The downtown location had many prominent supporters. They argued in part that it was cost-effective to locate the new building in the city because the university already owned the land. A large parcel of land would have to be purchased in Evanston if the building were to be built there. Does this argument make economic sense? No. It makes the common mistake of failing to appreciate opportunity cost. From an economic point of view, it is very expensive to locate downtown because the opportunity cost of the valuable lakeshore location is high: That property could have been sold for enough money to buy the Evanston land with substantial funds left over. In the end, Northwestern decided to keep the law school in Chicago. This was a costly decision. It may have been appropriate if the Chicago location was particularly valuable to the law school, but it was inappropriate if it was made on the presumption that the downtown land had no cost.

Marginal Cost (MC)

The increase in cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs. It is equal to the increase in variable cost or the increase in total cost that results from an extra unit of output. (it tells us how much it will cost to expand output by 1 unit.)

long-run cost with economies and diseconomies of scale

The long-run average cost curve is the envelope of the short-run average cost curves SAC1, SAC2, and SAC3. With economies and diseconomies of scale, the minimum points of the short-run average cost curves do not lie on the long-run average cost curve. The long-run average cost curve s the envelope of the short-run average cost curves - it envelops or surrounds the short-run curves. The long-run average cost curve exhibits economies of scale initially but exhibits its diseconomies at a higher output levels. Look at q1, with SAC1, relevant point is B with 8$, the average cost of production A on SAC2 is 10$, so B is better choice. The LAC curve NEVER lies above any of the short-run average cost curves. Because there are economies and diseconomies of scale in the long run, the points of minimum average cost of the smallest and largest plants do not lie on the lon-run average cost curve. Long-run marginal cost curve LMC is not the envelope of the short-run marginal cost curves. (they aplly to particular plant)

How can a firm eliminate fixed costs?

The only way that a firm can eliminate its fixed costs is by shutting down. It doesn't necessarily mean going out of business. It might be closed for some time, and be able to re-open the factory it had closed

example 7.3 the short-run cost of aluminum smelting

The production of aluminum begins with the mining of bauxite. The process used to separate the oxygen atoms from aluminum oxide molecules, called smelting, is the most costly step in producing aluminum. The expenditure on a smelting plant, although substantial, is a sunk cost and can be ignored. Fixed costs are relatively small and can also be ignored. For an output q up to 600 tons per day, total variable cost is $1140q, so marginal cost and average variable cost are constant at $1140 per ton. If we increase production beyond 600 tons per day by means of a third shift, the marginal cost of labor, maintenance, and freight increases from $320 per ton to $480 per ton, which causes marginal cost as a whole to increase from $1140 per ton to $1300 per ton. What happens to average variable cost when output is greater than 600 tons per day? When q > 600, total variable cost is given by: 𝑇𝑉𝐶 = 1140 600 + 1300 𝑞 − 600 = 1300𝑞 − 96,000 Therefore average variable cost is 𝐴𝑉𝐶 = 1300 − (96,000 / 𝑞) THE SHORT-RUN VARIABLE COSTS OF ALUMINUM SMELTING FIGURE 7.2 The short-run average variable cost of smelting is constant for output levels using up to two labor shifts. When a third shift is added, marginal cost and average variable cost increase until maximum capacity is reached.

the expansion path and long-run costs, three steps

To move from the expansion path to the cost curve, we follow three steps: 1. choose an output level represented by an isoquant in figure above. Then find the point of tangency of that isoquant with an isocost line. 2. from the chosen isocost line, determine the minimum cost of producing the output level that has been selected 3. graph the output-cost combination in figure from picture

total cost as a flow

Total cost is a flow: the firm produces a certain number of units per year. Thus its total cost is a flow—for example, some number of dollars per year. For simplicity, we will often drop the time reference, and refer to total cost in dollars and output in units. Knowledge of short-run costs is particularly important for firms that operate in an environment in which demand conditions fluctuate considerably. If the firm is currently producing at a level of output at which marginal cost is sharply increasing, and if demand may increase in the future, management might want to expand production capacity to avoid higher costs.

Shapes of cost curves, picture below

shows how various cost measures change as output changes. average total cost ATC is the sum of average variable cost VC and average fixed cost AFC. Marginal cost MC crosses the average variable cost and average total cost curves at their mnimum points. AFC falls continuously from 50 when output is 1, towards zero for large output. The shapes of remaining curves are determined by the relationship between the marginal and average cost curves. Because average total cost curve is the sum of avc and afc and afc curve declines everywhere, the vertical distance between the ATC and AVC curves decreases as output increases. AVC cost curve reaches its minimum at point at a lower output than the ATC curve. MC=AVC at its minimum point and MC=ATC at its minimum point. Bcs ATC is always greater than AVC curve must lie above and to the right of the minimum point of the AVC curve.

diseconomies of scale

situation in which a doubling of output requires more than a doubling of cost. U-shaped long-run average cost curve characterizes the firm facing economies of scale for relatively low output levels and diseconomies of scale for higher levels.

Economies of scope

situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product. There is no direct relationship between economies of scale and economies of scope.

diseconomies of scope

situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product.

economies of scale

situation in which output can be doubled for less than a doubling of cost. The term economies of scale includes increasing returns to scale as a special case, but it is more general because it reflects input proportions that change as the firm changes its level of production. U-shaped long-run average cost curve characterizes the firm facing economies of scale for relatively low output levels and diseconomies of scale for higher levels.

opportunity cost

the cost associated with opportunities forgone when a firm's resources are not put for their best alternative use.