Principles of economics openstax chapter7

College Principles ofPhysics Economics # Chapter Title ChapterChapter Cost and Industry Structure PowerPoint Image Slideshow Firm and production cost Amazon is an American international electronic commerce company that sells books, among many other things, shipping them directly to the consumer Market structure Perfect Competition: Many small firms selling “identical” products Monopolistic Competition: Many small-medium firms selling “similar” products Oligopoly: A few big firms selling “differentiated” products Monopoly: Only one firm selling “unique” products Market structure Business Concepts Cost: expenses of hiring resources for production of goods and services Revenue: incomes made from sale of goods and services Profit = Revenue - Cost Economic vs Accounting Cost Accounting Cost: Out-of-pocket costs or payments to suppliers of resources (e.g., wage, interest, rent) Economic Cost: Out-of-pocket cost + Opportunity cost Opportunity Cost: Cost of using own resources (e.g., managing your own business; using own vehicle for business) Production & Cost Functions Production Function: A graph showing the quantity of inputs used in production of various quantities of output Cost Function: A graph showing expenses of producing various quantities of output Production Costs Fixed Costs: Costs of hiring fixed inputs (e.g., rent, insurance premiums) Variable Costs: Costs of hiring variable inputs (e.g., wages, material costs) Total cost function At zero production, the fixed costs = $160 As production increases, variable costs are added to fixed costs TC = TFC + TVC Short-run Cost functions Marginal Cost: Additional cost of producing an extra unit of output = ΔTotal Cost / ΔOutput Average Total Cost = Total Cost / Output Total cost per unit of output Average Variable Cost = Total Variable Cost / Output Variable cost per unit of output Average Fixed Cost = Total Fixed Cost / Output Fixed cost per unit of output Short-run Cost functions Output TVC TFC TC MC* ATC AVC AFC 0 8500 8500 100 2500 8500 11000 25 110 25 85 200 3800 8500 12300 13 62 19 43 300 4800 8500 13300 10 44 16 28 400 6000 8500 14500 12 36 15 21 500 7500 8500 16000 15 32 15 17 600 9500 8500 18000 20 30 16 14 700 12500 8500 21000 30 30 18 12 800 17000 8500 25500 45 32 21 10.6 900 22500 8500 31000 55 34 25 9.4 1000 32500 8500 41000 100 41 32.5 8.5 * MC is per 100 units of output Short-run Cost functions Economies of scale Economies of scale: In the long-run, Average Cost falls as output expands due to internal efficiencies (e.g., buying raw materials in large volumes at discounted prices) A small factory like S produces 1,000 alarm clocks at AC = $12 per clock A medium factory like M produces 2,000 alarm clocks at AC = $8 per clock A large factory like L produces 5,000 alarm clocks at AC = $4 per clock 5-13 Economies of scale Long-Run AC Declines as more output produced Long-run average cost The LRAC is the “envelope” of SRAC curves The LRAC curve is actually based on a group of SRAC curves, each of which represents one specific level of fixed costs More precisely, the LRAC curve will be the least expensive average cost curve for any level of output 5-15 Long-run average cost Long-run average cost Minimum Efficient Scale (MES) Plant size at which the LRAC reaches its minimum point as the firm experiences extended economies of scale MES helps determine the number of firms in an industry and therefore the level of competition 5-17 Long-run average cost ... quantity of inputs used in production of various quantities of output Cost Function: A graph showing expenses of producing various quantities of output Production Costs Fixed Costs: Costs of hiring... expenses of hiring resources for production of goods and services Revenue: incomes made from sale of goods and services Profit = Revenue - Cost Economic vs Accounting Cost Accounting Cost: Out -of- pocket... Economies of scale Long-Run AC Declines as more output produced Long-run average cost The LRAC is the “envelope” of SRAC curves The LRAC curve is actually based on a group of SRAC curves, each of which