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Economics
MBAFT 6103
Today
Cost Curves
Overview
1. Motivation: HiSense
2. Long Run Cost Functions
Shifts
Long run average and marginal cost functions
Economies of scale
Motivation: Hisense
Chinese Electronics Manufacturer --- pcs, mobile
phone, TVs, refrigerators, air cons
Very high growth from 1990
Entered the U.S. Market in 2005
Concerns --- how production cost will change as
volume goes up? How changes in input prices will
affect cost? Short-run? Long-run?
4
K0
TC
K1
K0
L0 L1
TC = TC0
TC = TC1
TC1=wL1+rK1
TC0 =wL0+rK0
Q0
Q1 Q
-w1/r
Q0
-w0/r
L
9
TC(Q) after
TC(Q) before
Q
10
MC
AC
Q
13
Related Concept:
Economies of Scale
If average cost decreases as output rises, all else
equal, the cost function exhibits economies of scale.
Similarly, if the average cost increases as output rises,
all else equal, the cost function exhibits diseconomies
of scale.
What would you do as a manager if there is economies
of scale at the point at which you are operating?
14
Industry
Iron and Steel
Cotton Textiles
Cement
Electricity and Gas
TC,Q
0.553
1.211
1.162
0.3823
16
18
19
Total Cost
TC2
TC1
TC0
TC(Q)
Q0
Q1
Q
20
21
SMC
SAC
AVC
AFC
0
Q
22
SAC(Q,K3)
SAC(Q,K1)
SAC(Q,K2)
Q1
Q2
AC(Q)
Q3
Q (units)
23
Next
Perfectly Competitive Market
24