minimizing cost
Download
Skip this Video
Download Presentation
Minimizing Cost

Loading in 2 Seconds...

play fullscreen
1 / 15

Minimizing Cost - PowerPoint PPT Presentation


  • 121 Views
  • Uploaded on

Minimizing Cost. The Long Run Cost Minimization Problem. Long run: The period of time that is long enough for the firm to vary the quantities of all of its inputs as much as it desires. Short run: The period of time in which at least one of the firm’s input quantities cannot be

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Minimizing Cost' - avon


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
the long run cost minimization problem
The Long Run Cost Minimization Problem
  • Long run:

The period of time that is long enough for the firm to vary the quantities of all of its inputs as much as it desires.

  • Short run:

The period of time in which at least one of

the firm’s input quantities cannot be

changed.

the long run cost minimization problem continued
The Long Run Cost Minimization Problem (continued)
  • Min TC = wL + rK

of producing Q units of output.

Min = minimize.

TC = Total Cost.

w = the price of a unit of labor service.

r = the price per unit of capital services.

L = Labor.

K = Capital.

isocost
Isocost
  • Isocost:

The set of combinations of labor and capital that yield the same total cost for the firm.

Figure 7.1. Page 232

the solution to the long run cost minimization problem
The Solution To The Long Run Cost Minimization Problem
  • When the isoquant is just tangen to an isocost line

Figure 7.2. Page 233

Cost minimizing input combination

Slope Isoquant = Slope Isocost

(MPl / w) = (MPk / r)

slide6
Problem:

Production function Q = 50 (LK)1/2

w = 5; r = 20

What is the cost minimizing if the firm want to produce Q = 1000?

slide7
Answer:

MPl = 25 (K/L)1/2

MPk = 25 (L/K)1/2

( MPl / w ) = (MPk / r)

[ 25 (K/L)1/2 / 5 ] = [ 25 (L/K)1/2 / 20 ]

L = 4K

K = 10

L = 40

TC = ?

deriving the input demand curves from a production function
Deriving The Input Demand Curves From A Production Function
  • Problem:

The production function Q = 50 (LK)1/2

What are the demand curves for Labor and Capital?

(MPl / w) = (MPk / r)

K = f (r, w, Q)

L = f (r, w, Q)

the price elasticity of demand for inputs
The Price Elasticity Of Demand For Inputs
  • Price Elasticity Of Demand For Labor:

The percentage change in the cost minimizing quantity of labor with respect to a 1 percent change in the price of labor.

e L,w = (DL / Dw) / (w / L)

the price elasticity of demand for inputs continued
The Price Elasticity Of Demand For Inputs (continued)
  • Price Elasticity Of Demand For Capital:

The percentage change in the cost minimizing quantity of labor with respect to a 1 percent change in the price of capital.

e L,w = (DK / Dr) / (r / K)

short run cost minimization
Short Run Cost Minimization
  • TC = TVC + TFC

TC = Total Cost.

TVC = Total Variable Cost.

TFC = Total Fixed Cost.

short run cost minimization continued
Short Run Cost Minimization (continued)
  • TVC:

the sum of expenditures on variable inputs, such as labor and materials, at the short run cost minimizing input combination.

  • TFC:

the cost of fixed inputs, it does not vary with output.

slide15
Figure 7.15. Page 249

Short Run Input Demand Versus Long Run Input Demand.

ad