Chapter Outline

Short-run costs are analyzed in relation to output produced.
1. The full opportunity costs of production are broken down into fixed and variable costs.
2. Marginal cost is the change in either variable cost or total cost when output is increased.
3. Average variable cost is derived from the total product curve by multiplying the amount of variable input needed for a given output by its price, and then dividing the result by the quantity produced.
4. The total cost curve is the vertical summation of the total variable cost and the total fixed cost curves.
5. Average cost can be found by finding the slope of a ray from the origin to the total cost curve at a given quantity of output.
6. Marginal cost can be found by finding the slope of the total cost or total variable cost curve at a given quantity of output.
When production of the same product takes place using two different techniques, the marginal costs in each process should be the same for total output to be produced efficiently.
Average variable cost is the inverse of the average product times the price of a sole variable input, while marginal costs are the inverse of the marginal product times the price of the variable input.
Long-run costs have no fixed inputs.
1. An isocost line shows what combinations of inputs have the same total cost, and its slope shows the relative factor prices.
2. Output is optimized for a given expenditure when the isoquant is tangent to the isocost line. (Unless the isoquants slope is everywhere steeper or flatter than that of the isocost line.)
3. Differing slopes of the isocost line lead to differing factor combinations, as illustrated in the textbook example of grain production in Canada and East Africa.
4. As more output is desired, input combinations on higher isocost lines will be required.
5. A long-run total, marginal, and average cost curve can be derived from the expansion path.
6. Constant, increasing, or decreasing returns to scale can occur as output expands.
Industries with declining costs over a large range of output fit the category of natural monopolies, since meaningful competition is absent in these cases.
(Appendix) An isoquant map can be used to identify both long-run and short-run costs if a particular plant size is fixed for the short-run analysis.
1. The total cost identified from the expansion path is used to derive long-run average and marginal costs.
2. The costs identified from the short-run expansion path are used to derive short-run cost curves, which themselves identify points on the long-run average cost curves.
(Appendix) The cost minimization problem uses the Lagrange multiplier method of constrained minimization to find the tangency point of the isoquant and isocost line, and hence the cost minimizing input combination.

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