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Theory of cost cn f long run
1.
RET PA HC
8 Costs and Output Decisions in the Long Run Prepared by: Fernando Quijano and Yvonn Quijano © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
2.
The Concept of
Profit • Profit is the difference between total revenue and total cost. • The economic concept of profit takes into account the opportunity cost of capital. • Total economic cost includes a normal rate of return. A normal rate of return is the rate that is just sufficient to keep current investors interested in the industry. • Breaking even is a situation in which a firm is earning exactly a normal rate of return. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
3.
The Long-Run Average
Cost Curve • The long-run average cost curve (LRAC) is a graph that shows the different scales on which a firm can choose to operate in the long-run. Each scale of operation defines a different short-run. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
4.
The Long-Run Average
Cost Curve • The long run average cost curve of a firm exhibiting economies of scale is downward- sloping. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
5.
Weekly Costs Showing
Economies of Scale in Egg Production JONES FARM TOTAL WEEKLY COSTS 15 hours of labor (implicit value $8 per hour) $120 Feed, other variable costs 25 Transport costs 15 Land and capital costs attributable to egg production 17 $177 Total output 2,400 eggs Average cost $.074 per egg CHICKEN LITTLE EGG FARMS INC. TOTAL WEEKLY COSTS Labor $ 5,128 Feed, other variable costs 4,115 Transport costs 2,431 Land and capital costs 19,230 $30,904 Total output 1,600,000 eggs Average cost $.019 per egg © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
6.
A Firm Exhibiting
Economies and Diseconomies of Scale • The long-run average cost curve of a firm that eventually exhibits diseconomies of scale becomes upward-sloping. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
7.
Optimal Scale of
Plant • The optimal scale of plant is the scale that minimizes average cost. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
8.
Internal Versus External
Economies of Scale • Economies of scale that are found within the individual firm are called internal economies of scale. • External economies of scale describe economies or diseconomies of scale on an industry-wide basis. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
9.
Long-Run Costs: Economies
and Diseconomies of Scale • Increasing returns to scale, or economies of scale, refers to an increase in a firm’s scale of production, which leads to lower average costs per unit produced. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
10.
Long-Run Costs: Economies
and Diseconomies of Scale • Constant returns to scale refers to an increase in a firm’s scale of production, which has no effect on average costs per unit produced. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
11.
Long-Run Costs: Economies
and Diseconomies of Scale • Decreasing returns to scale refers to an increase in a firm’s scale of production, which leads to higher average costs per unit produced. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
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