chapter 8 – costs and production. production the total amount of output produced by a firm is a...

26
Chapter 8 – Costs and production

Post on 21-Dec-2015

224 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Chapter 8 – Costs and production

Page 2: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Production The total amount of output The total amount of output

produced by a firm is a function of produced by a firm is a function of the levels of input usage by the the levels of input usage by the firmfirm

Total Physical Product (TPP) Total Physical Product (TPP) function - a short-run relationship function - a short-run relationship between the amount of labor and between the amount of labor and the level of output, the level of output, ceteris paribusceteris paribus..

Page 3: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Total physical product (TPP)

Page 4: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Law of diminishing returns as the level of a variable input

rises in a production process in which other inputs are fixed, output ultimately increases by progressively smaller increments.

Page 5: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Average physical product (APP) APP = TPP / amount of input

Quantityof labor TPP APP

0

5

10

15

20

25

30

35

40

45

0

50

120

180

220

250

270

275

275

270

-10

12

12

11

10

9

7.86

6.88

6

Page 6: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Marginal physical product (MPP)

the additional output that results from the use of an additional unit of a variable input, holding other inputs constant

measured as the ratio of the change in output (TPP) to the change in the quantity of labor (or other input) used

Page 7: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Computation of MPP and APP

Note that the MPP is positive when an increase in labor results in an increase in output; a negative MPP occurs when output falls when additional labor is used.

Quantityof labor TPP APP

0

5

10

15

20

25

30

35

40

45

MPP0

50

120

180

220

250

270

275

275

270

-10

12

12

11

10

9

7.86

6.88

6

10

14

12

8

6

4

1

0

-1

Page 8: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

TPP

Page 9: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Shape of MPP curve MPP rises when TPP increases

at an increasing rate, and declines when TPP increases at a decreasing rate.

MPP is negative if TPP declines when labor use rises

Page 10: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Relationship of APP and MPP

APP rises when MPP > APP

APP falls when MPP < APP

APP is maximized when MPP = APP

Page 11: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Total costs Short run Long run Short run costs:

fixed costs – costs that do not vary with the level of output. Fixed costs are the same at all levels of output (even when output equals zero).

variable costs – costs that vary with the level of output (= 0 when output is zero)

Page 12: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Example

Page 13: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Example (cont.)

Page 14: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Fixed costs

Page 15: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Variable costs

Page 16: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

TC, TVC, and TFC

Page 17: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Average fixed cost Average fixed cost (AFC) = TFC / Q

Page 18: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Average variable cost Average variable cost (AVC) = TVC

/ Q

Page 19: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Average total cost Average total cost (ATC) = TC / Q ATC = AFC + AVC (since TFC + TVC = TC)

Page 20: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Marginal cost Marginal cost (MC) = cost of an additional

unit of output

Page 21: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Average fixed cost

Page 22: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

AVC, ATC, and MC

Note that the MC curve intersects the AVC and ATC at their respective minimum points

Page 23: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Long-run costs In the long run, a firm may choose its level of

capital, and will select a size of firm that provides the lowest level of ATC.

Page 24: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Economies and diseconomies of scale Economies of scale – factors that lower

average cost as the size of the firm rises in the long run Sources: specialization and division of labor,

indivisibilities of capital, etc. Diseconomies of scale – factors that raise

average cost as the size of the firm rises in the long run Sources: increased cost of managing and

coordination as firm size rises Constant returns to scale – average costs do

not change as firm size changes

Page 25: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Long-run average total cost (LRATC)

Page 26: Chapter 8 – Costs and production. Production The total amount of output produced by a firm is a function of the levels of input usage by the firm The

Minimum efficient scale Minimum efficient scale = lowest

level of output at which LRATC is minimized