production and its costs n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
PRODUCTION AND ITS COSTS PowerPoint Presentation
Download Presentation
PRODUCTION AND ITS COSTS

Loading in 2 Seconds...

play fullscreen
1 / 57

PRODUCTION AND ITS COSTS - PowerPoint PPT Presentation


  • 81 Views
  • Uploaded on

PRODUCTION AND ITS COSTS. Principles of Microeconomic Theory, ECO 284 John Eastwood CBA 213 523-7353 e-mail address: John.Eastwood@nau.edu http://jan.ucc.nau.edu/~jde. ALL ABOUT COSTS. Explicit and Implicit Costs Accounting Profit and Economic Profit Sunk Costs.

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 'PRODUCTION AND ITS COSTS' - nola-watson


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
production and its costs
PRODUCTION AND ITS COSTS
  • Principles of Microeconomic Theory, ECO 284
  • John Eastwood
  • CBA 213
  • 523-7353
  • e-mail address: John.Eastwood@nau.edu
  • http://jan.ucc.nau.edu/~jde
all about costs
ALL ABOUT COSTS
  • Explicit and Implicit Costs
  • Accounting Profit and Economic Profit
  • Sunk Costs
explicit and implicit costs
Explicit and Implicit Costs
  • Explicit Costs

An explicit cost is incurred when an actual monetary payment is made.

  • Implicit Costs

Implicit costs are the value of the resources used in the production of a good for which no monetary payment is made.

accounting profit and economic profit
Accounting Profit and Economic Profit
  • Accounting Profit = Total Revenue - total explicit costs
  • Economic Profit = Total Revenue - opportunity costs
  • Opportunity Costs= Explicit costs + Implicit costs
normal profit
Normal Profit
  • When a firm's revenue just covers its opportunity costs, it is earning a zero economic profit.
  • This is also known as a normal profit.
  • Total Cost (TC) includes all opportunity costs, including a normal profit.
sunk costs
Sunk Costs
  • Costs incurred in the past that cannot be changed by current decisions and cannot be recovered are said to be "sunk."
production and costs in the short run
PRODUCTION AND COSTS IN THE SHORT RUN
  • The Short-Run Production Function
  • Inputs And Costs In The Short Run
  • Total, Average and Marginal Costs
production functions
Production Functions
  • . . . express the relationship between the quantity of the inputs and the maximum quantity of output (q) that can be produced with those inputs.
  • The quantities of some inputs are variable in the short run (e.g., labor, materials)
  • The quantity of other inputs (e.g., capital, land) are fixed in the short run.
short run production function a k a tp l
Short-Run Production Function (a.k.a. TPL)
  • . . . expresses the relationship between the quantity of the labor and the maximum quantity of output (q) that can be produced, holding the quantity of other inputs (e.g., capital, land) constant.
the average marginal rule
The Average - Marginal Rule
  • When the marginal magnitude (e.g. product, cost, or utility) exceeds the average magnitude, the average must rise.
  • When the marginal magnitude is less than the average magnitude, the average must fall.
  • Marginal curve intersects average curve at a maximum or minimum.
from definitions to cost curves
From Definitions to Cost Curves
  • The Law of Diminishing Marginal Returns
    • As more units of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline.
inputs and costs in the short run
Inputs And Costs In The Short Run
  • Fixed And Variable Inputs
  • Fixed and Variable Costs
  • Total Cost = Total Fixed Cost + Total Variable Cost
  • TC= TFC + TVC
example w wage q sand tons day l labor 8 hr worker shifts day
Example: w=wage; q= Sand (Tons/Day); L=Labor (8-hr. worker-shifts /Day)

w = $50/worker-shift

TVC = wL($/day)

TFC = $100/day

TC = TFC + TVC

example w wage q sand tons day l labor 8 hr worker shifts day1
Example: w=wage; q= Sand (Tons/Day); L=Labor (8-hr. worker-shifts /Day)

w = $50/worker-shift

TVC = wL($/day)

TFC = $100/day

TC = TFC + TVC

example w wage q sand tons day l labor 8 hr worker shifts day2
Example: w=wage; q= Sand (Tons/Day); L=Labor (8-hr. worker-shifts /Day)

w = $50/worker-shift

TVC = wL($/day)

TFC = $100/day

TC = TFC + TVC

average cost concepts
Average Cost Concepts
  • Average Fixed Cost, AFC=TFC/q
  • Average Variable Cost, AVC=TVC/q
  • Average Total Cost, ATC=TC/q
  • where q = the quantity of output.
marginal cost mc
Marginal Cost, MC:
  • The change in total cost that results from a one unit change in output.
average marginal rule again
Average - Marginal Rule (Again)
  • When the marginal magnitude exceeds the average magnitude, the average must rise.
  • When the marginal magnitude is less than the average magnitude, the average must fall.
  • MC cuts AVC and ATC at their lowest points.
total costs shown as areas
Total Costs Shown as Areas
  • TC at a given quantity, q, equals the area of the rectangle formed by the origin, q, and ATCq (along both the y-axis and on the curve.
  • Rectangles formed by AVC and AFC at q show TVC and TFC.
avc and app l are related
AVC and APPL are Related
  • As APPL rises, AVC decreases; as APPL falls, AVC increases. Assume labor is the only variable input:
diminishing marginal returns and marginal cost
Diminishing Marginal Returns and Marginal Cost
  • MC and MPP are related. As MPP rises, MC decreases; as MPP falls, MC increases.Assume labor is the only variable input:
production and costs in the long run
PRODUCTION AND COSTS IN THE LONG RUN
  • Least-cost production
  • Long run average (total) cost.
  • Returns to Scale
  • Economies of Scope
  • Technological Change
equal mpp per dollar
Equal MPP per Dollar
  • In the long run, all inputs may vary. For example, K may be substituted for L.
  • Least-cost production requires that each resource is equally productive at the margin:
the long run average total cost curve lratc
The Long-Run Average Total Cost Curve (LRATC)
  • Each possible plant size has a unique short-run ATC curve.
  • LRATC shows the lowest average cost at which the firm can produce any given level of output.
how lratc changes with the scale of the firm
How LRATC Changes with the Scale of the Firm
  • Economies of Scale (a.k.a. Increasing returns to scale) LRATC has a negative slope.
  • Constant Returns to Scale LRATC has a slope = 0.
  • Diseconomies of Scale (a.k.a. Decreasing returns to scale) LRATC has a positive slope.
constant returns to scale
Constant Returns to Scale
  • Say we double all inputs and get double the output
    • q = f(K,L), and f(2K,2L)=2q
    • LRATC=LRTC/q
    • With w & i constant, LRTC doubles.
    • LRATC ($/unit) is the same at q and 2q.
  • This is Constant Returns to Scale, CRS.
increasing returns to scale
Increasing Returns to Scale
  • Say we double all inputs and get more than twice the output
    • q = f(K,L), but f(2K,2L)>2q
    • With w & i constant, LRTC doubles.
    • Output more than doubles.
    • LRATC = LRTC/q ($/unit) falls
  • This is Increasing Returns to Scale, IRS (a.k.a. Economies of Scale)
decreasing returns to scale
Decreasing Returns to Scale
  • Say we double all inputs, but get less than twice the output
    • q = f(K,L), but f(2K,2L)<2q
    • With w & i constant, LRTC doubles.
    • But output less than doubles.
    • LRATC = LRTC/q ($/unit) rises
  • This is Decreasing returns to scale (a.k.a. Diseconomies of Scale )
lratc is the planning curve
LRATC is the Planning Curve
  • Optimum Plant Size
    • What is the most efficient scale of operations?
  • Minimum Efficient Scale
    • What is the smallest plant that will be competitive?
cost curves shift when
COST CURVES SHIFT WHEN
  • Input prices change
  • The production function shifts
    • Technological progress occurs
    • The quantity of fixed inputs changes
  • Taxes change
input prices
Input Prices
  • Higher prices for fixed inputs shift

TFC, TC, AFC, and ATC up.

  • Higher prices for variable inputs shift

TVC, TC, AVC, ATC, and MC up.

technological progress affects costs in two ways
Technological progress affects costs in two ways:
  • It may improve the production process
  • It may lower input prices
taxes
Taxes
  • . . . on fixed inputs
  • . . . on variable inputs, output, revenue, profit, etc.
isocosts and isoquants
Isocosts and Isoquants
  • Isocost means one cost.
  • Isocost lines are similar to budget lines.
  • Isoquant means one quantity.
  • Isoquants are similar to indifference curves.
isocost lines show bundles of l k of equal cost
Isocost lines show bundles of (L,K) of equal cost
  • Let TC = Total Cost
  • L = quantity of L
  • w= price of L
  • K = quantity of K
  • k= price of K
  • The y-intercept equals:
  • The slope equals the relative price of L($/unit L)/ ($/unit K)= units of K per unit of L
changes in the isocost line
Changes in the Isocost Line
  • Increases in TC shift the Isocost out.
  • The vertical intercept increases when TC increases.
  • Changes in relative factor prices rotate the budget line. The slope equals the relative price of L (w/k) . A lower w yields a smaller |slope|.
isoquant curves
Isoquant Curves
  • One isoquant through each point.
  • Each isoquant slopes down to the right.
  • Isoquants further from the origin show higher quantities of output.
  • Isoquants never cross.
  • Isoquants are bowed toward the origin.
slope of an isoquant
Slope of an Isoquant
  • at a point equals - MRTSLK
  • MRTSLK is the Marginal Rate of Technical Substitution of K for L.
  • MRTSLK = # of units of K the firm must add to replace one unit of L.
least cost production
Least-Cost Production
  • . . . occurs once the firm reaches the lowest possible isocost attainable given its output goal.
  • At that point, the slopes of the isocost and the isoquant are equal.
equal mpp per dollar1
Equal MPP per Dollar
  • The tangency of the Isocost and the Isoquant imply that K and L are equally efficient at the margin.
diminishing returns again
Diminishing Returns (Again)
  • In Figure 11, on page 189, illustrates this concept using isoquants.
  • K is fixed in the SR,
  • As more L is added, the MPPL eventually falls.
product and process technology

q

TPnew

q2

q1

0

L

L2

L1

Product and Process Technology
  • Better product technology results in new or improved products.
  • Better process technology shifts the production function upward.

TPold

factors that shift tp up

q

TPnew

q2

q1

0

L

L2

L1

Factors that shift TP up
  • Better process technology.
  • More of the fixed factors of production.
  • Workers’ skills improved.

TPold

technology and industrial evolution
Technology and Industrial Evolution
  • Mass production tech. allowed the use of task-specific capital and relatively low-skilled labor.
  • Early development of this technology gave the US an edge in manufacturing.
  • Other factors added to our comparative advantage: abundant N; long history of HS education; no bombs hit us in WWII.
henry ford s model t
Henry Ford’s Model T
  • The car was an advance in product technology.
  • Ford’s mass production techniques advanced process technology.
  • Large amounts of capital were combined with labor
    • resulting in a high MPPL,
    • and correspondingly high wages.
strategy task specific capital low skilled labor
Strategy: Task-specific capital & low skilled labor
  • Long production runs can make this strategy profitable.
  • Much of the competition in the auto industry focused on product technology -- adding features, changing styles -- rather than on reducing costs, and cutting price.
success for a while
Success -- for a while
  • The auto industry’s methods were copied by many other corporations.
  • Even today, US firms often lead in developing new products (e.g., VCRs and fax machines).
comparative advantage lost
Comparative Advantage Lost
  • Our CA could not last forever.
  • Technology and capital travel easily across international borders.
  • Other countries copied our products and our production techniques.
mass production migrates
Mass Production Migrates
  • Task-specific capital requires only low skilled labor.
  • Many of these countries had lower wages.
  • The CA in auto manufacturing and other industries began to shift abroad.
  • US producers could compete only by lowering wages, or producing overseas.
better process technology
Better Process Technology
  • R&D focused on developing process technology to reduce costs has enabled Germany and Japan to pay high wages.
  • Using general capital and skilled labor, firms develop new products quickly and profitably over short production runs.
  • Requires skilled labor -- US skills lag others.