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    06 Production and Costs II

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    Matej Vlcek
    1. The document discusses microeconomics concepts related to costs in the long run and short run, including expansion paths, cost curves, returns to scale, and how costs are affected by changes in input prices and technology. 2. It explains how firms determine the cost-minimizing combination of inputs at different output levels to arrive at an expansion path and how this determines the shapes of total, average, and marginal cost curves in the long run. 3. The short run is defined as holding one input (capital) fixed, leading to diminishing returns and different per-unit cost curves compared to the long run.

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    06 Production and Costs II

    Uploaded by

    Matej Vlcek
    16 views23 pages
    1. The document discusses microeconomics concepts related to costs in the long run and short run, including expansion paths, cost curves, returns to scale, and how costs are affected by changes in input prices and technology. 2. It explains how firms determine the cost-minimizing combination of inputs at different output levels to arrive at an expansion path and how this determines the shapes of total, average, and marginal cost curves in the long run. 3. The short run is defined as holding one input (capital) fixed, leading to diminishing returns and different per-unit cost curves compared to the long run.

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    06_Production_and_Costs_II

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    1. The document discusses microeconomics concepts related to costs in the long run and short run, including expansion paths, cost curves, returns to scale, and how costs are affected by changes in input prices and technology. 2. It explains how firms determine the cost-minimizing combination of inputs at different output levels to arrive at an expansion path and how this determines the shapes of total, average, and marginal cost curves in the long run. 3. The short run is defined as holding one input (capital) fixed, leading to diminishing returns and different per-unit cost curves compared to the long run.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    16 views23 pages

    06 Production and Costs II

    Uploaded by

    Matej Vlcek
    1. The document discusses microeconomics concepts related to costs in the long run and short run, including expansion paths, cost curves, returns to scale, and how costs are affected by changes in input prices and technology. 2. It explains how firms determine the cost-minimizing combination of inputs at different output levels to arrive at an expansion path and how this determines the shapes of total, average, and marginal cost curves in the long run. 3. The short run is defined as holding one input (capital) fixed, leading to diminishing returns and different per-unit cost curves compared to the long run.

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    You are on page 1of 23

    Microeconomics

    Lecture 6
    Petr Špecián, Ph.D.
    Mail: petr.specian@vse.cz
    Office hours: see InSIS
    Week #6: Reading
    Compulsory: NS Chapters 7 & 8

    2
    Costs in the Long Run

    3
    Input Choice & Cost Minimization
    K
    Cost minimization:

    𝑤
    𝑅𝑇𝑆!" # "!$ % =
    𝑣

    TC3
    E TC2
    K*
    q1
    TC1
    L* L
    4
    RTS and Marginal Products
    𝑹𝑻𝑺 as a ratio of marginal products
    𝑀𝑃&
    𝑅𝑇𝑆 =
    𝑀𝑃'
    • For cost minimizing combination:
    𝑀𝑃& 𝑤
    𝑅𝑇𝑆 = =
    𝑀𝑃' 𝑣

    𝑀𝑃& 𝑀𝑃'
    =
    𝑤 𝑣
    5
    Expansion Path
    Expansion path: set of cost- K
    minimizing input combinations at
    TC3
    various levels of output

    U E
    T
    S
    K1* q3
    q2
    TC1 q1 TC2
    L1* L
    6
    Cost Curves
    Expansion path: how minimum-cost input use grows when 𝑞 expands
    ÞCost curves

    7
    Total, Average, and Marginal Costs
    Total cost
    Average cost
    𝑇𝐶
    𝐴𝐶 =
    𝑞
    Marginal cost
    𝑑𝑇𝐶
    𝑀𝐶 =
    𝑑𝑞

    8
    Costs and Returns to Scale
    Beware! Study the relationship between returns to scale and cost
    curves in your textbook pp. 250-256 (especially figures 7.3 & 7.4)

    9
    Costs and Constant Returns to Scale

    𝑞 𝑞

    10
    Shifting the Cost Curves

    11
    Shifts in Cost Curves
    Change in economic conditions that affects the expansion path will
    also affect the firm’s cost curves

    12
    Changes in Input Prices
    A change in the price of an input → rotates isocosts → alters EP

    • E.g., a rise in wage rates

    13
    Changes in Input Prices
    Increase in wages → increase in costs

    Extent of the shift?


    1. How important labor is in production
    2. How successful the firm is in substituting other inputs for labor

    14
    Technological Innovation
    Technological change alters the firm’s production function
    • Isoquant maps shifts → firm’s EP changes

    • Unbiased improvements shift isoquants toward the origin

    15
    Technological Innovation
    Technological change biased toward the use of one input will:
    • Alter isoquant maps
    • Shift expansion paths
    • Affect the shape and location of cost curves

    E.g., workers become more skilled, this only improves productivity of


    labor

    16
    Costs in the Short Run

    17
    Holding Capital Input Constant
    K
    Capital input held constant at 𝐾0
    ST
    • Law of diminishing returns C
    3
    applies
    ST
    C
    2

    ST
    C
    1

    K0
    q3
    q2
    q1
    L1 L2 L3 18 L
    Total Cost in the Short Run
    Fixed costs versus variable costs

    TC in the short run:


    𝑆𝑇𝐶 = 𝑉𝐶 + 𝐹𝐶 = 𝑤 ∗ 𝐿 + 𝑣 ∗ 𝐾!

    19
    Total Cost in the Short Run STC
    STC,
    FC,
    VC
    VC
    FC = 30

    FC
    30

    q 20
    Per-Unit Short-Run Cost Curves
    Short run average cost
    𝑆𝑇𝐶
    𝑆𝐴𝐶 =
    𝑞
    Short run marginal cost
    d𝑆𝑇𝐶
    𝑆𝑀𝐶 =
    d𝑞

    The relationship between marginal and average variables holds again

    21
    Per-Unit Short-Run Cost Curves
    Average variable cost
    𝑉𝐶
    𝐴𝑉𝐶 =
    𝑞
    Average fixed cost
    𝐹𝐶
    𝐴𝐹𝐶 =
    𝑞

    22
    $/q
    MC SAC

    AVC

    SACmin

    AVCmin
    Per-Unit Costs in the SR

    AFC

    q0 q1 q
    23

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