Production and Cost Analysis Part IIb The Long Run

1
Production and Cost AnalysisPart II-b (The Long
Run)

• Cost Relationship
• Economies of Scope
• Accounting Profit vs. Economic Profit

2
Cost Relationship (long-run and short-run)
Moving from short-run to long-run
Cost Per Unit
SRATC1
MC1
Quantity
0
Q1
3
Cost Relationship (long-run and short-run)
The law of diminishing marginal
productivity limits the ability to cost
effectively expand output in the short-run.
Increasing output from Q1 to Q2 results in rising
average costs
Cost Per Unit
Quantity
Q1
Q2
0
4
Shift in Supply Curve

• A change in supply occurs when factors like
  these, but not limited to these, change
• Changes in the prices of inputs used in the
  production of a good
• Changes in technology
• Changes in taxes and subsidies
• Changes in suppliers' expectations

5
Increase in Supply (Opossums Wine)
price per unit
S
B
25
dollars
15
quantity/month
0
5000
2500
7500
(liters)
6
Cost Relationship (long-run and short-run)
The long-run average total cost curve is
determined by the various short-run cost curves
of the firm.
Cost Per Unit
LRATC
Quantity
0
7
The Supply Decision

• Price must be expected to exceed cost for a good
  to be supplied.

8
Production and Cost AnalysisPart II-b (The Long
Run)

• Cost Relationship
• Economies of Scope
• Accounting Profit vs. Economic Profit

9
Economies of Scope

• Economies of scope occur if its less costly to
  produce a second good when its already producing
  another.

10
Production and Cost AnalysisPart II-b (The Long
Run)

• Cost Relationship
• Economies of Scope
• Accounting Profit vs. Economic Profit

11
Accounting Profit vs. Economic Profit
The owner of a business expects to be rewarded
with profit for the entrepreneurial skills
provided, and the risk taken.
12
Accounting Profit vs. Economic Profit
Profit is included as part of total cost. Since
marginal cost is derived from the change in total
cost, then profit is included in marginal cost.
13
Accounting Profit vs. Economic Profit
Total Revenue 82, 000
14
Accounting Profit vs. Economic Profit
Total Revenue 82, 000 Less Explicit
Costs Labor 16, 000 Supplies 4,
000 Rent / Insurance 6, 000 Total
Explicit Cost 26, 000 Accounting
Profit 56, 000
15
Accounting Profit vs. Economic Profit
Total Revenue 82, 000 Less Explicit
Costs Labor 16, 000 Supplies 4,
000 Rent / Insurance 6, 000 Total
Explicit Cost 26, 000 Accounting
Profit 56, 000