baeb602 chapter 5: cost production

BAEB602

School of Marketing and Entrepreneurship (SoME)FACULTY OF BUSINESS AND MANAGEMENT

PREPARED BY:Nur Suhaili Ramli

CHAPTER 5

MICROECONOMICS

COST PRODUCTION

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CHAPTER 5: COST PRODUCTION

The Meaning of Costs

Opportunity costs

meaning of opportunity cost

examples

Measuring a firm’s opportunity costs

factors not owned by the firm: explicit costs

factors already owned by the firm: implicit costs

irrelevance of:

historic costs

replacement costs

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Production in the Short run

Production functions

factors of production

labour

land and raw materials

capital

entrepreneurship

the relationship between inputs and output

TPP = ƒ(F1, F2, F3, … Fn)

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Production in the Short run

Long-run and short-run production

fixed and variable factors

distinction between short run and long run

The law of diminishing returns

The short-run production function:

total physical product (TPP)

average physical product (APP)

marginal physical product (MPP)

the graphical relationship between TPP, APP and MPP

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Costs in the Short run

Costs and inputs

costs and the productivity of factors

costs and the price of factors

Fixed costs and variable costs

Total costs

total fixed cost (TFC)

total variable cost (TVC)

TVC and the law of diminishing returns

total cost (TC = TFC + TVC)

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Marginal cost

marginal cost (MC) and the law of diminishing returns

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Marginal cost

marginal cost (MC) and the law of diminishing returns

the relationship between MC and TC curves

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Average cost

average fixed cost (AFC)

average variable cost (AVC)

average (total) cost (AC)

Relationship between average and marginal cost

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Production in the Long run

All factors variable in long run

The scale of production:

constant returns to scale

increasing returns to scale

decreasing returns to scale

Returns to scale and economies and diseconomies of scale

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Economies of scale

specialisation & division of labour

indivisibilities

container principle

greater efficiency of large machines

by-products

multi-stage production

organisational & administrative economies

financial economies

Economies of scope

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Diseconomies of scale

managerial diseconomies

effects of workers and industrial relations

risks of interdependencies

External economies of scale

External diseconomies of scale

Location

balancing the distance from suppliers and consumers

importance of transport costs

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Optimum combination of factors

MPPa/Pa = MPPb/Pb ... = MPPn/Pn

Decision making in different time periods

very short run

short run

long run

very long run

decisions can be made for all time periods at the same time

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Costs in the Long run

Long-run average costs shape of the LRAC curve assumptions behind the curve

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Long-run average costs

shape of the LRAC curve

assumptions behind the curve

Long-run marginal costs

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Relationship between long-run and short-run average costs

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the envelope curve

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the envelope curve

Long-run cost curves in practice

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the envelope curve


the evidence

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the envelope curve


the evidence

minimum efficient plant size

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Class Activity

Before leaving the class, you should submit the following: Identify the following

Short run Long run Total cost Total average cost

Name, ID, classcode

baeb602 chapter 5: cost production

Business

run marginal

marginal costmarginal

run average

run cost curves

cost production

lrac curveassumptions

short run

long run