Electrons end their trip in the Stanford accelerator with an energy thousands of times greater than their initial rest energy. In theory, if you could travel with them, would you notice an increase in their energy? In their momentum? In your moving frame of reference, what would be the approximate speed of the target they are about to hit?
ECON202 Week 10 3/22/16, Module 22, Firm Costs Recall: For a firm =TR-TC o =(PxQ)-TC What total cost actually means Two types of inputs: o Fixed- unable to change in the short run o Variable- changeable to change in the short run o From last class: example of a farm employing only land and labor in production Divide TC into two categories corresponding to input types o Fixed cost (FC)- costs associated with all of your fixed inputs Does not change with production levels in the short run o Variable Costs (VC)- costs associated with all of your variable inputs Changeable with production levels in the short run; will increase as production expands o Both include explicit and implicit costs For our farm: Every day, we are paying $400 in rent, we pay each worker $200 per day o Our rent is fixed, doesn’t depend on production level (FC) o Our payment to workers is our variable cost (VC) Labor Q FC VC TC 0 0 400 0 400 1 19 400 200 600 2 36 400 400 800 o As we expand our laborers by hiring more workers, the gains to output that we receive falls (law of diminishing returns) o FC=TC at Q=0 o TC gets steeper as diminishing returns set in Marginal Cost (MC): additional cost incurred to produce one more unit o MC=TC/Q o Slope of TC curve o MC eventually rises as diminishing returns sets in More useful to look at TC, FC, and VC on average o More useful because it is more directly related to the idea of economic profit Average total cost (ATC): tells us the average cost paid to produce each unit o Sometimes referred to as “average cost” o ATC=TC/Q o What does this curve look like TC=FC+VC Divide both sides by Q TC/Q=FC/Q+VC/Q ATC= AFC+AVC (average fixed and variable costs) Average Fixed Cost (AFC): Always fall as we expand production (Q rises) spreading effect AFC= FC/Q Tendency to bring ATC down Average Variable Cost (AVC): AVC=VC/Q Will rise at some point due to diminishing returns diminishing returns effect Drags ATC up ATC is U shaped Spreading effect wins initially until diminishing returns becomes too strong Labor Q MPL FC VC TC MC AFC AVC ATC 0 0 ---- 400 0 400 ---- ---- ---- ---- 1 19 19 400 200 600 10.5 21.05 10.53 31.58 3 2 36 17 400 400 800 11.7 11.11 11.11 22.22 7 Marginal Product of Labor (MPL) tells us how much more output we gain from each additional worker (laborer) o Q/L 2 Marginal Cost (MC) of 19 units o 600-400/19-0=10.53 o TC/Q Average Fixed Cost (AFC) of 19 units o 400/19=21.05 Average Variable Cost (AVC) of 19 units o 200/19=10.53 Average Total Cost (ATC) of 19 units o 600/19=31.58 o AFC+AVC=ATC General Cost Curves: o q on x, $ on y representing price Small q represents firm quantity Big Q represents quantity being produced in the market o AFC starts high and continuously falls o Marginal Cost looks like a Nike swoosh Initially, it might fall a little bit due to gains from specialization Upward slope shows how diminishing return makes marginal cost increase o ATC is U shaped with the vertex intersecting the Marginal Cost Curve. o AVC is U shaped with the vertex intersecting the Marginal Cost Curve, but situated below ATC on the graph. o Why does MC intersect ATC it its minimum When a quantity line is to the left of the intersection point, MC < ATC Next unit produced is cheaper than each average unit has been before that one. ATC is dragged down When quantity line is to the right of the intersection point, MC > ATC 3 Next unit produced is more expensive than each average unit has been before that one ATC is dragged up When the quantity line is at the minimum, intersection point, MC = ATC This is the lowest ATC can be 3/24/16, Module 23, Long Run Costs and Economies of Scale Long run- all inputs are variable o E.g. firm’s lease expires and it can choose from a variety of buildings o Firms “choose” their fixed cost Example: Manufacturing firm has 3 building sizes to choose from: small, medium, large o Each location has a unique set of FC each has its own ATC o Firm chooses from ATCs, ATCm, and ATCl For small building: Low FC, but diminishing return sets in quicker For medium building: Medium FC, and diminishing return sets in at a middle point For large building: High FC, diminishing return sets in less quickly o Firm chooses location (FC) so that ATC will be minimized at their anticipated level of production Derives long run ATC curve (LRATC): bottom of each curve in order to minimize its total costs. o At any point on the graph to the left of the ATCs and ATCm intersection point, it is most beneficial to choose the small building. o In the middle of the intersections, choose the medium building o To the right of ATCm and ATCl, choose the large building o As the number of options for the firm increases, the LRATC becomes smooth and U shaped “Economies of scale”, growing makes us more efficient (to the left of the midpoint on LRATC curve) 4 “Increasing returns to scale” A situation where as you increase inputs, your outputs increase more than the inputs you are adding. Increasing efficiency as we increase production o Specialization o High set up costs (high FC) o Network externalities: some firms benefit from operating within networks (e.g. social media) Diseconomies of scale/Decreasing returns to scale (to the right of midpoint on LRATC curve) Decreasing efficiency as we expand production o Coordination problems- too big to function well o Inefficiencies Midpoint of the LRATC curve: constant returns to scale 5