Contents Ødefinition of costs Øshort run costs Ørelationship between marginal, average and total costs Ølong run costs Ørelationship between short run and long run costs Ørelationship between production function and cost functions Øfirm´s revenues Øtotal, average, marginal revenues Ørevenues functions upon different types of market competition Definition of costs Øaccountable costs: — all costs that the firm really pays – explicit costs, „visible“ in firm´s accountancy — Øeconomic costs: — accountable (explicit) costs + opportunity (implicit) costs Costs on labour and capital Ølabour costs = wage rate (w) – costs per one working hour Øcapital costs = rental (r) – costs per one machine hour – derived from the interest rate, which is the firm´s opportunity cost Ø sunk costs – costs with zero opportunity costs (i.e. costs on very special capital equipment with no alternate usage) Short run costs – total values ØShort Total Costs, STC = w.L + r.Kfix Øw.L = labour costs; variable costs (VC)... Ø...are changing with changing output (mostly costs on wages, materials, energy etc.) Ør.Kfix = capital costs; fixed costs (FC)... Ø...remain constant with changing output (mostly amortization, rents, insurance etc.) STC = w.L + r.Kfix = VC + FC Short run costs – average values ØShort Average Costs: — SAC = STC/Q = (FC+VC)/Q ØAverage Fixed Costs: — AFC = FC/Q = r.K/Q = r.1/APK = r/APK ØAverage Variable Costs: — AVC = VC/Q = w.L/Q = w.1/APL = w/APL Ø... and again... Short Average Costs: — SAC = AVC + AFC Short run costs – marginal values ØShort Marginal Costs (SMC) = costs on additional output; change of total costs induced with the unity output increase ØSMC = ∂STC/∂Q = ∂VC/∂Q Relationship between total, average, marginal costs in short run Q Q Q1 Q2 Q3 CZK/Q CZK FC VC STC AFC AVC SAC SMC Q1 – minimal SMC – increasing returns to labour change into diminishing returns to labour Q2 – minimal AVC Q3 – minimal SAC – to this spot the firm increases the effectiveness of capital Relationship between marginal and average costs Øintersection of MC function and AC function lies in the minimum of AC functions Ø...general relationship of marginal and average values Øif MC < AC, then AC decrease Øif MC > AC, then AC increase Ødevelopment of MC depends on the character of returns to labour (in SR) or returns to scale (in LR) Relationship between marginal and average costs Q Q0 AC MC CZK/Q MC>AC MC-1 AR = d MR AR = TR/Q = (a-b.Q) Q / Q = a – b.Q AR also represents the firm´s demand function (d) MR = ∂TR/∂Q = ∂(a-b.Q) Q / ∂ Q = a – 2b.Q Total revenues upon imperfect competition market Q CZK TR ePD <-1 ePD >-1 ePD =-1 ePD <-1 relative drop of price is smaller than the relative increase of quantity demanded – TR grows ePD =-1 relative change of price equals to the relative change of quantity demanded – TR is constant (and maximal) ePD >-1 relative drop of price is bigger than the relative increase of quantity demanded – TR decreases TR = P.Q TR = (a – b.Q).Q Firm´s revenues upon unitary price elasticity of demand Q CZK/Q ePD =-1 AR = d TR – constant, MR = 0 Q CZK TR Firm´s revenues upon fluctuating price elasticity of demand Q CZK/Q ePD <-1 ePD =-1 ePD >-1 AR = d ePD <-1 ePD >-1 Q CZK TR