7. The Cost of Production

Transcription

1 7. The Cost of Production Literature: Pindyck and Rubinfeld, Chapter 7 Varian, Chapters 20, 21 Frambach, Chapter Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 1

2 Chapter Outline Measuring Cost: Which Costs Matter? Cost in the Short Run Cost in the Long Run Long-Run versus Short-Run Cost Curves Estimating and Predicting Cost Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 2

3 Introduction Production technology measures the relationship between input and output. Given a particular production technology, managers have to decide how much to produce. In order to determine the optimal production level and the optimal input combinations, we have to convert the production technology into units, i.e., in terms of Euros or costs Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 3

4 Measuring Cost: Which Costs Matter? Economic and Accounting Cost Accounting Cost Actual expenses plus depreciation charges for capital equipment. Economic Cost Cost to a firm of utilizing economic resources in production, including opportunity cost Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 4

5 Measuring Cost: Which Costs Matter? Opportunity Cost Cost associated with opportunities that are forgone when a firm s resources are not put to their best alternative use. For example: Consider a firm that owns a building and therefore pays no rent for office space. Does this mean that the cost of office space is zero? Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 5

6 Measuring Cost: Which Costs Matter? Sunk Cost Expenditure that has been made and cannot be recovered Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 6

7 Measuring Cost: Which Costs Matter? For example, Suppose a firm pays 500,000 for an option to purchase a building. The price of the building without taking into consideration the cost of the option is equal to 5 Million; i.e., its total expenditure will be 5.5 million. The firm finds that a comparable building has become available at a price of 5.25 million. Which building should it buy? Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 7

8 Measuring Cost: Which Costs Matter? Fixed and Variable Cost Total Cost (TC or C): Total economic cost of production, consisting of fixed and variable costs. TC = FC + VC Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 8

9 Measuring Cost: Which Costs Matter? Fixed and Variable Cost Fixed Cost A cost that does not vary with the level of output and that can only be eliminated by going out of business. Variable Cost A cost that varies as output varies Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 9

10 Fixed Cost Measuring Cost: Which Costs Matter? Fixed costs do not vary with the level of output they must be paid even if there is no output. The only way that a firm can eliminate its fixed costs is by going out of business. Sunk Cost Costs that have already been incurred and can not be recovered Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 10

11 Measuring Cost: Which Costs Matter? Fixed and Variable Cost Computers: Most costs are variable. Components, labor. Software: Most costs are sunk. Costs of developing software. Pizzas: Most costs are fixed. Time spent by the owner or salaries of workers, rent, etc Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 11

12 A Firm s Short-Run Costs ( ) Rate of Fixed Variable Total Marginal Average Average Average Output Cost Cost Cost Cost Fixed Variable Total Cost Cost Cost (FC) (VC) (TC) (MC) (AFC) (AVC) (ATC) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 12

13 Cost in the Short Run The marginal cost (MC): increase in cost resulting from the production of one extra unit of output. MC = VC= TC or dc(q) Q Q dq Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 13

14 Cost in the Short Run The average total cost (ATC) is the firm s total costs divided by its level of output; i.e., the average fixed cost (AFC) plus the average variable cost (AVC). This can be written as follows: ATC FC = + Q VC Q Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 14

15 Cost in the Short Run The determinants of short run cost: The relationship between the production and cost function can be illustrated by either increasing or decreasing income and costs Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 15

16 Cost in the Short Run Assume that the company can employ labor (L) that earns wage (W). Then we have MC VC Q = VC = wl VC = w L MC w L = Q Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 16

17 Cost in the Short Run Continued MP L Q = L L 1 L for 1 unit Q = = Q MP L Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 17

18 Cost in the Short Run As a result, we get: MC = w MP L a low marginal product of labor (MMPP LL ) means that a large amount of additional labor is needed to produce more output- a fact that leads, in turn, to a high marginal cost (MC) and vice versa Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 18

19 Cost curves for a firm Cost ( per year) 400 The total cost (TC) is the vertical sum of fixed cost (FC) and variable cost (VC). TC VC The variable cost (VC) is zero when output is zero and them increases continuously as output increases The fixed cost (FC) does not vary with output. FC Output Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 19

20 Cost curves for a firm Cost ( per year) MC ATC AVC AFC Output (units/yr) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 20

21 Cost curves for a firm Consider the line drawn from the origin to point A: The slope of the line measures AVC. P 400 TC VC The slope of the VC curve is the MC. Consequently, the tangent to VC is the marginal cost of production when output is 7 (point A). That is AVC = MC FC A Output Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 21

22 Cost curves for a firm Cost per unit: Because TFC is 50, AFC falls continuously. When MC < AVC or MC < ATC, then AVC and ATC curves fall. When MC > AVC or MC > ATC, then AVC and ATC curves rise. Cost ( per unit) MC ATC AVC AFC Output (units/yr) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 22

23 Cost curves for a firm Cost per unit: At a minimum of the AVC curve, the MC = AVC The AVC reaches its minimum because the AFC curve declines everywhere, the vertical distance between ATC and AVC curve decreases as output increases. AVC reaches its minimum at a lower output than the ATC. Cost ( per unit) Output (units/yr) MC ATC AVC AFC Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 23

24 Production Costs for Aluminum Smelting ($/Ton based on an Output of 600 Tons/Day) Per-Ton Costs that are Constant for All Output Levels Electricity $316 Aluminum 369 Other raw materials 125 Plant power and fuel 10 Subtotal $ Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 24

25 Production Costs for Aluminum Smelting ($/Ton based on an Output of 600 Tons/Day) Per-Ton Costs that Increase when output exceeds 600 Tons/day Labor $150 Maintenance 120 Freight 50 Subtotal $320 Total per-ton production costs $1140 If we increase production beyond 600 tons/day, the marginal cost of labor, maintenance, and freight increase by 50%. The output produced cannot exceed 900 tons Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 25

26 The Short-Run Variable Costs of Aluminum Smelting Cost ($ per ton) 1300 MC AVC Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 26

27 Costs in the Long Run The User Cost of Capital User cost of capital: the annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest. In addition, the opportunity cost (the interest not received) must be taken into consideration. User cost of capital = economic depreciation + (interest) * (value of capital) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 27

28 Costs in the Long Run The User Cost of Capital Example Delta airlines buys a Boeing 737 for $150 million with an expected life-span of 30 years. Annual economic depreciation = $150 million / 30 (years) = $5 million Interest rate = 10% Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 28

29 Costs in the Long Run The User Cost of Capital Example Cost of capital = $5 million + (0.10)($150 million depreciation) Year 1 = $5 million + (0.10)($150 million) = $20 million Year 10 = $5 million + (0.10)($100 million) = $15 million Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 29

30 Costs in the Long Run The User s Cost of Capital Rate per dollar of capital r = depreciation rate + interest rate Example: Airline Depreciation rate = 1/30 = 3.33%/year Interest rate = 10%/year Cost of capital r = = 13.33%/year Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 30

31 Costs in the Long Run The Corporation s Decision: The Cost-Minimizing Input Choice Assumption: Two inputs: labor (L) and capital (K) Cost of labor: wage (W) Price of capital r = depreciation rate + interest rate Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 31

32 Costs in the Long Run The Cost-Minimizing Input Choice Isocost line: graph showing all possible combinations of labor and capital that can be purchased for a given total cost. The total cost C of producing any particular output is given by the sum of the firm s labor cost wl and its capital cost rk: C = wl + rk Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 32

33 Costs in the Long Run The Isocost line If we rewrite the total cost equation as an equation for a straight line, we get K = C/r - (w/r)l The isocost line has a slope of: K = L ( w ) r Which is the ratio of the wage rate to the rental cost of capital. This indicates the rate at which labor can be replaced with capital, without changing the costs Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 33

34 Choosing Inputs Now we turn to the minimization of costs at a certain production level. This is done by combining the isocost curves with isoquants Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 34

35 Producing a given Output at a minimum Cost Capital per year Q 1 is an isoquant for the output Q 1. The isocost curve C 0, gives all the combinations of K and L that cost C 0. K 2 C O, C 1, C 2,are three isocost lines. K 1 A The isocost line C 2 gives the quantity Q 1, that can be produced with the combination K 2 L 2 or K 3 L 3. However, yielding the same output but at higher costs in comparison to combination K 1 L 1. K 3 Q 1 L 2 L 1 C 0 C 1 C 2 L 3 Labor per year Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 35

36 Input Substitution when an Input Price changes Capital per year When the price of labor increases, the isocost curves become steeper K 2 K 1 B A Output Q 1 is now produced at point B on isocost curve C 2 by using L 2 and K 2. The new production combination yields higher costs for labor in comparison to capital. Therefore, the firm should substitute labor with capital. Q 1 C 2 C 1 L 2 L 1 Labor per year Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 36

37 Cost in the Long Run The isoquants, the isocost lines, and the production functions: MRTS = - K = MP L L MP K Slope of the isocost line: K L = ( w ) r MP L MP K = w r Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 37

38 Cost in the Long Run It follows that when a firm minimizes the cost of producing a particular output, the following condition holds: MP L w = MP K r MMMM LL WW is the additional output that results from spending an additional Euro for labor. MMMM KK rr is the additional output that results from spending an additional Euro for capital Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 38

39 Example: The Effect of Effluent Fees on Input Choices Effluent: wastewater treated or untreated that flows out of a treatment plant, sewer, or industrial outfall. Generally refers to waste discharged into surface waters. An effluent fee is a per-unit fee that the steel firm must pay for the effluent that goes into the river. How would a producer react to an effluent fee charged on production? Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 39

40 Example: The Effect of effluent Fees on Input Choices Consider the following scenario facing a Steel Firm: 1) Located on a river, thus benefiting from lower transportation and waste disposal costs. 2) The environmental protection agency levies a charge per unit of wastewater to reduce the amount of pollution. 3) How should the firm react? Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 40

41 The Cost-Minimizing Response to an Effluent Fee Capital (Machinehours per Month) 5,000 Slope of the isocost line= -10/40 = ,000 3,000 2,000 A 1,000 Output of 2,000 Tons of Steel per Month 0 5,000 10,000 12,000 18,000 20,000 Waste water (gallons per month) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 41

42 The Cost-Minimizing Response to an effluent Fee Capital (machine hours per month) 5,000 4,000 3,500 3,000 Slope of the isocost curve = -20/40 = F B When the firm is not charged for dumping its wastewater in a river, it chooses to produce a given output using 10,000 gallons of wastewater and 2000 machine-hours of capital at A. However, an effluent fee raises the cost of wastewater, shifts the isocost curve from FC to DE, and causes the firm to produce at B a process that results in much less effluent 2,000 A 1,000 E C Output of 2,000 Tons of Steel per month 0 5,000 10,000 12,000 18,000 20,000 Wastewater (gallons per month) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 42

43 The Effect of effluent Fees on Input Choices Remarks: The effluent fee is more effective the better the substitutability between the factors of production. The better the substitutability, the less the firm has to pay (e.g., $50,000 for combination B instead of $100,000 for combination A) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 43

44 Cost in the Long Run Cost Minimization with Varying Output Levels Expansion path: curve passing through points of tangency between a firm s isocost lines and its isoquants Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 44

45 The Expansion Path Capital per year The expansion path (from the origin through points A, B, and C) illustrates the lowest-cost combinations of labor and capital that can be used to produce each level of output in the long run Isocost line Isocost line A B C 200 Unit Isoquant Expansion path Unit Isoquant Labor per year Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 45

46 A Firm s Long-Run Total Cost Curve Cost per year 3000 F Long-Run total cost 2000 E 1000 D Output (units per year) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 46

47 Long-Run versus Short-Run Cost Curves What happens to average cost when both inputs are variable (in the long-run), in comparison to the average cost when only one input varies (short-run)? Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 47

48 The Inflexibility of Short-Run Production Capital per year E C The long run expansion path is drawn as before. A Long-Run Expansion Path C 2 C 1 P Short-Run Expansion Path Q 2 Q 1 L 1 L 2 B L 3 D F Labor per year Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 48

49 Long-Run Average Cost (LAC) Constant returns to scale If the input doubles, the output doubles as well, and average costs remain the same for all production levels. Increasing returns to scale If input doubles, the output more than doubles and average costs decrease for all production levels. Decreasing returns to scale If input doubles, output less than doubles and average costs increase if we increase the quantity produced Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 49

50 Long-Run and Short-Run Cost Curves Long-Run Average Cost curve (LAC) In the long-run If the firm faces decreasing or increasing returns to scale, the LAC has a U-shape Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 50

51 Long Run and Short Run Cost Curves Long-Run Average Cost curve (LAC) The long-term marginal cost curve determines the longterm average cost curve: When LMC < LAC, then LAC is falling. When LMC > LAC, then LAC is rising. Consequently, LAC reaches its minimum when the two curves intersect (LMC = LAC) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 51

52 Long-Run Average Cost Cost ( per unit of output) LMC LAC A Output Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 52

53 Long-Run and Short Run-Cost Curves Economies and Diseconomies of Scale Economies of scale Output can be doubles for less than a doubling of cost Diseconomies of Scale A doubling of output requires more than a doubling of cost Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 53

54 Long-Run and Short-Run Cost Curves Economies of scale are often measured in terms of a cost-output elasticity, E C. E C is the percentage change in the cost of production resulting from a 1-percent increase in output: Ec = ( C / C) /( Q / Q) Ec = ( C / Q) / ( C / Q) = MC / AC Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 54

55 Long-term and Short-term Cost curve Therefore, the following applies: E C < 1: MC < AC Economies of scale; increasing returns to scale E C = 1: MC = AC Constant returns to scale E C > 1: MC > AC Diseconomies of scale; decreasing returns to scale Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 55

56 Long-Run Cost with Economies and Diseconomies of Scale Cost ( per unit of output) SAC 1 The long-run average cost curve LAC is the envelope of the short-run average cost curves SAC 1, SAC 2, and SAC 3. SAC 2 SAC 3 SMC 1 SMC 2 SMC 3 10 LAC = LMC Q1 Q 2 Q 3 Output Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 56

57 The Long-Run costs of constant Returns to Scale Remark: The optimal size firm depends on the expected value of the quantity produced (e.g., choosing Q 1 for SAC 1 and so on). The long run average cost curve is the envelope of the short run average cost curves. Question: What would happen to the average costs if a production level other than the given production level was chosen? Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 57

58 Long-Run Cost with Economies and Diseconomies of Scale Cost ( per unit of output) SAC 1 SAC 3 LAC 10 8 A B SAC 2 LMC SMC 1 SMC 2 SMC 3 With an output Q 1, the manager would choose the small plant size where SAC 1 equals to 8. Point B is on the LAC (for 3 plant sizes), since this is the most effective operational size for a certain amount of goods produced. Q 1 Output Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 58

59 The Long-Run costs of non-constant Returns to Scale What is the long-term cost curve of the firms? Firms can change their size in the long term to adjust for changes made in the quantity of goods produced. The long-term cost curve is equal to the dark blue part of the SAC curve representing the minimum cost for each production level Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 59

60 Estimating and Predicting Cost Estimates of future costs can be determined from a cost function that correlates the production costs with the production level and other variables that the company can control for. Let us assume that we want to derive the overall cost curve for automobile production Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 60

61 The Overall Cost Curve for the Automobile Industry Variable Cost General Motors Nissan Toyota Honda Volvo Ford Chrysler Quantity of cars Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 61

62 Estimating and Predicting Cost A linear cost function (not U-shaped) could be as follows: VC = βq The linear cost function is only applicable if the marginal costs are constant. The marginal costs are represented by: β Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 62

63 Estimating and Predicting Cost If we want to consider a U-shaped average cost curve and marginal costs that are not constant, we can use the quadratic cost function: VC = βq+ γ Q Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 63

64 Estimating and Predicting Cost If the marginal cost curve is not linear, we can use the cubic cost function: 2 3 VC = βq+ γ Q + δq Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 64

65 Cubic Cost Function Cost ( per unit of output) MC = β + 2γQ+ 3δQ 2 AVC = β + γq + δq 2 Output (per time period) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 65

66 Estimation and Prediction of Costs Difficulties in measuring cost 1) Production information can represent a sum of different types of products. 2) The data on costs may not take into account opportunity costs. 3) The distribution of costs to a specific product can be difficult to calculate if there is more than one product in the product range Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 66

67 Estimation and Prediction of Costs Cost functions and the measurement of economies of scale. Scale economies index (SCI): provides an index of whether or not there are economies of scale. E C = 1, SCI = 0: no economies of scale, i.e., diseconomies of scale. E C > 1, SCI negative: economies of scale. E C < 1, SCI positive: economies of scale Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 67

68 Cost Functions for Electric Power Economies of Scale in the Electric Power Industry Output (million kwh) Value of SCI in Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 68

69 Average Cost of Production in the Electric Power Industry Average cost (dollars per 1000 kwh) A Output (billion kwh) Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 69

70 Cost Functions for Electric Power Results Decrease in costs Not due to economies of scale Rather, due to Lower costs for inputs (coal and oil). Improvement in Technology Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 70

71 Concluding Remarks Managers, investors, and economists must take into account the opportunity costs associated with the company's resources. In the short term, companies are confronted with both fixed and variable costs. If there is one variable input in the short term, the existence of decreasing returns determines the course of the cost curves. In the long run, all production factors are variable Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 71

72 Concluding Remarks The expansion path of a company describes how its costminimizing input selection changes as the size or output of a company increases. The long-term average cost curve is the sum of short-term average cost curves Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 7 Slide 72