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CLASS
NOTES FOR ECONOMICS 251
DR.
WILLIAM SHINGLETON
FALL
2005
THESE
NOTES ARE FOR SEPTEMBER 20-22
TUESDAY
FINISH NOTES FROM LAST WEEK
COST/CH 21
THURSDAY
FIRST EXAMINATION CH 1-4,20+APPNDX
25 MULTIPLE CHOICE/ 3 POINTS EACH
1 25 POINT ESSAY
CLOSED BOOK/CLOSED NOTE/TIME LIMIT
COST/CHAPTER 21
PRODUCTION
FUNCTION
PRODUCTIVITY
GROWTH IN AVERAGE PHYSICAL PRODUCT OF LABOR
NON-FARM BUSINESS/HOURLY
SOURCE:
http://data.bls.gov/cgi-bin/surveymost
/LATEST
1.8 SPRING 2005
2004
3.4
2003
3.8
2002 4.0
2001 2.5
2000 2.7
1999 2.8
1998 2.8
1997 1.6
1996 2.7
1995 0.5
EFFECT ON UNIT LABOR COST
MARGINAL PHYSICAL PRODUCT OF LABOR
SPECIALIZATION AND RISING MPPL
MCDONALDS
ADAM SMITH'S PIN FACTORY
DIMINISHING RETURNS
COST CONCEPTS
STARTING PREMISIS: EFFICIENCY
SUNK COSTS...NOT RELEVANT TO PRODUCTION DECISION
EXAMPLE...REAL ESTATE IN A DEPRESSED MARKET
VALUABLE FOR LEARNING
FIXED COST (OVERHEAD)
VARIABLE COST (OPERATING EXPENSES)
TOTAL COST
INTRODUCTION TO ATC (PER UNIT COST) FROM AVERAGE
PRODUCT
ATC = AVC + AFC AND SKETCH
MARGINAL COST
HOW TO SHOW COST PATTERNS
EFFECT OF QUANTITY CHANGE
HOW TO SHOW COST CHANGES
VARIABLE
COST
PRODUCTIVITY
DIMINISHING RETURNS
SUBSTITUTABILITY
LONG RUN AVERAGE COST (LRAC)
SHORT RUN / LONG RUN RESOURCE USE
ECONOMIES OF SCALE (FALLING LRAC)
AS SIMPLE AS BAKING COOKIES
DISECONOMIES OF SCALE (RISING LRAC)
CONSTANT RETURNS TO SCALE
MINIMUM EFFICIENCY SCALE(MES)
CLOSING
NOTES ON LRAC
ALL COSTS ARE VARIABLE IN LONG RUN NO LRATC,
LRAVC, LRAFC
LRAC DOES NOT INCLUDE JUST/ALL LOW POINTS FROM
ATC CURVES
WHAT DOES LRAC IMPLY FOR THE DEGREE OF
COMPETITION?
NATURAL MONOPOLY
NEXT
WEEK
THE
COMPETITIVE FIRM CH
22-23