Your SlideShare is downloading. ×
0
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
topic 4
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

topic 4

1,807

Published on

Published in: Education, Technology
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
1,807
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
96
Comments
0
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Topic 4 Production and Costs
  • 2. PRODUCTION & COSTS <ul><li>1. Production & Costs concepts </li></ul><ul><li>2. Short run Costs </li></ul><ul><li>3. Long Run Costs </li></ul>
  • 3. 1. Some cost concepts Opportunity Cost <ul><li>Opportunity cost : </li></ul><ul><li>The benefit foregone, or opportunity lost, by not using resources in their best alternative use </li></ul><ul><ul><li>Real Opportunity cost: </li></ul></ul><ul><ul><ul><li>Maximum quantity of output forgone </li></ul></ul></ul><ul><ul><li>Money Opportunity cost </li></ul></ul><ul><ul><ul><li>Maximum value of output forgone (measured in monetary terms such as VND or USD) </li></ul></ul></ul>
  • 4. 1. Some cost concepts Explicit Vs. Implicit Cost <ul><li>Explicit costs </li></ul><ul><ul><li>what the firm actually pays for use of resources in business (eg. Wages, rent, raw materials) </li></ul></ul><ul><li>Implicit costs </li></ul><ul><ul><li>opportunity costs of resources owned and used by the firm but not actually paid for by the firm (eg. The opportunity cost of the owner's labour) </li></ul></ul>
  • 5. 1. Profit concepts <ul><li>Accounting profit </li></ul><ul><ul><li>=Total revenue – Total Explicit costs </li></ul></ul><ul><li>Economic profit </li></ul><ul><li>= Total revenue – (Total Explicit costs + Total Implicit costs) </li></ul><ul><li>= Total revenue – Opportunity costs of all resources used </li></ul><ul><li>Normal profit </li></ul><ul><li> = Zero Economic profit or breaking even </li></ul><ul><li> = The minimum cost payment just sufficient to keep the firm in business </li></ul>
  • 6. Exercise Bill runs a computer shop as a sole proprietorship. The following data are about his financial matters in his first year of business. Calculate Bill's accounting profit and economic profit for his first year of business. Raw materials used 67,000 Salary for an assistant 30,000 Depreciation of the durable assets 14,000 Dividend that he could have earned by investing his $70,000 in shares 4,200 Purchase of durable assets with his own money 70,000 Interest paid to the bank 9,000 Loan from a bank 90,000 Salary that Bill could have earned if he had worked for another firm 65,000 Total revenue 190,000 $
  • 7. 1. Short- Run Vs Long-Run <ul><li>Short run </li></ul><ul><ul><li>the time frame in which </li></ul></ul><ul><ul><li>at least one input factor is fixed </li></ul></ul><ul><li>Long run </li></ul><ul><ul><li>the time frame in which </li></ul></ul><ul><ul><li>all input factors are variable </li></ul></ul><ul><ul><li>There is no fixed calendar definition of long or short run– it depends! </li></ul></ul>
  • 8. 2. Short Run Production <ul><li>Assume all factors fixed, except labour </li></ul><ul><li>Average Product of labour (AP L ) is the total product output per unit of labour </li></ul><ul><li>where: Q is the total product output </li></ul><ul><li>L is no. of labour units </li></ul>
  • 9. 2. Short Run Production <ul><li>Marginal product of labour (MP L ) is the additional product output resulting from an extra unit of labour </li></ul><ul><li>∆ Q is the change in product output </li></ul><ul><li>∆ L is no. of units of labour </li></ul><ul><li>TP = Q = Total product or Total output </li></ul>
  • 10. Wheat production per year from a particular farm (tonnes) Copyright 2001 Pearson Education Australia
  • 11. Law of Diminishing Returns <ul><li>&quot;... as successive units of a variable resource (say, labor) are added to a fixed resource (say, land), beyond some point the marginal product (MP) attributable to each additional unit of the variable resource will decline.&quot; (Jackson, p.228) </li></ul>
  • 12. Law of Diminishing Returns <ul><li>Assuming…. </li></ul><ul><li>- a variable resource (labour ) is added to a set of fixed resources (plants & machinery) </li></ul><ul><li>- technology is given </li></ul>
  • 13. Law of Diminishing Returns <ul><li>As units of a variable resource are added to a set of fixed resources, with technology constant, the marginal product of the variable resource must eventually diminish. </li></ul><ul><li>That is, when the optimal combination between labour and fixed resources has been reached, any further addition of labour means that each worker will have less and less of the fixed resources (plants & machinery) to work with, and so they must become less and less efficient. </li></ul>
  • 14. Wheat production per year from a particular farm Tonnes of wheat per year TP Tonnes of wheat per year MP Number of farm workers ( L ) Number of farm workers ( L ) Copyright 2001 Pearson Education Australia
  • 15. Wheat production per year from a particular farm Tonnes of wheat per year TPP Tonnes of wheat per year MPP b Diminishing returns set in here Number of farm workers ( L ) Number of farm workers ( L ) b Copyright 2001 Pearson Education Australia
  • 16. Wheat production per year from a particular farm Tonnes of wheat per year TP Tonnes of wheat per year MP b d d Number of farm workers ( L ) Number of farm workers ( L ) Maximum output b Copyright 2001 Pearson Education Australia
  • 17. The Production Curves <ul><li>MP cuts through AP at the maximum AP </li></ul><ul><ul><li>When marginal > average, average is increasing </li></ul></ul><ul><ul><li>When marginal falls below average, average starts falling too. </li></ul></ul><ul><li>When MP > 0, TP increasing </li></ul><ul><li>When MP < 0, TP decreasing </li></ul><ul><li>When MP = 0, TP is at its maximum </li></ul>
  • 18. To practice what we’ve done so far…
  • 19. Short run Costs <ul><li>Total Costs </li></ul><ul><ul><li>Total Fixed Cost TFC </li></ul></ul><ul><ul><li>Total Variable Cost TVC </li></ul></ul><ul><ul><li>Total Cost TC = TFC + TVC </li></ul></ul><ul><li>Average Costs </li></ul><ul><ul><li>Average fixed cost (AFC) = TFC/Q </li></ul></ul><ul><ul><li>Average Variable cost (AVC) = TVC/Q </li></ul></ul><ul><ul><li>Average Total cost (ATC) = TC/Q = AFC+AVC </li></ul></ul>
  • 20. Short-run Costs Quantity Costs (dollars) TC Total Cost Fixed Cost TVC Variable Cost TFC
  • 21. Short run Costs <ul><li>Marginal Cost (MC) is the extra cost of producing one more unit of a product </li></ul><ul><ul><li>MC = ∆TC / ∆Q </li></ul></ul><ul><ul><li>MC = ∆TVC / ∆Q </li></ul></ul>
  • 22. Marginal Cost Relationships <ul><li>When MC < ATC </li></ul><ul><ul><li>ATC falls </li></ul></ul><ul><li>When MC > ATC </li></ul><ul><ul><li>ATC increases </li></ul></ul><ul><li>When ATC = MC </li></ul><ul><ul><li>ATC is at its minimum </li></ul></ul>
  • 23. Cost Relationships Relationship b/w TVC, TFC & TC MC cuts both AVC & ATC at their minimum points AFC is decreasing
  • 24. 2.To practice what we’ve done so far… <ul><li>Review Question 2, 3 pp 15, 16 </li></ul>
  • 25. 3. LONG-RUN THEORY OF PRODUCTION <ul><li>In the long run All factors of production are variable </li></ul>
  • 26. LONG-RUN THEORY OF PRODUCTION <ul><li>Economies of scale: </li></ul><ul><li>As firm increases its scale of output => LRAC decreases. </li></ul><ul><li>Reasons </li></ul><ul><li>Specialisation & division of labour </li></ul><ul><li>Managerial Specialization </li></ul><ul><li>Efficient Capital </li></ul><ul><li>Bulk Buying </li></ul><ul><li>Greater efficiency of large machines </li></ul><ul><li>Supporting Facilities </li></ul>
  • 27. Economies of Scale Output O Costs ($) (a) Economies of scale LRAC Copyright 2001 Pearson Education Australia
  • 28. LONG-RUN THEORY OF PRODUCTION <ul><li>Diseconomies of scale </li></ul><ul><ul><li>As firm increases its scale of output, LRAC increases. </li></ul></ul><ul><li>Reasons: </li></ul><ul><ul><li>Over specialization of labor </li></ul></ul><ul><ul><li>Managerial Problems- Bureaucracy </li></ul></ul><ul><ul><li>Access to Materials </li></ul></ul><ul><ul><li>Access to skilled labours </li></ul></ul>
  • 29. Diseconomies of Scale Output O Costs (b) Diseconomies of scale LRAC Copyright 2001 Pearson Education Australia
  • 30. Constant Return to scales Output O Costs (c) Constant costs LRAC Copyright 2001 Pearson Education Australia
  • 31. A typical long-run average cost curve Output O Costs LRAC Economies of scale Constant Return to scale Diseconomies of scale Copyright 2001 Pearson Education Australia q1 q2
  • 32. Minimum Efficient Scale (MES) <ul><li>Definition : </li></ul><ul><li>MES is the smallest level of output at which a firm can minimize its LR average costs. </li></ul><ul><ul><li>MES occurs at q1 unit of output </li></ul></ul>
  • 33. A typical long-run average cost curve Output O Costs LRAC Economies of scale Constant Return to scale Diseconomies of scale Copyright 2001 Pearson Education Australia q1 q2 MES
  • 34. Constructing long-run average cost curves: factories of fixed size SRAC 1 Costs Output O 1 factory Copyright 2001 Pearson Education Australia
  • 35. Constructing long-run average cost curves: factories of fixed size SRAC 1 SRAC 2 Costs Output O 2 factories Copyright 2001 Pearson Education Australia
  • 36. Constructing long-run average cost curves: factories of fixed size SRAC 1 SRAC 3 SRAC 2 Costs Output O 3 factories Copyright 2001 Pearson Education Australia
  • 37. Constructing long-run average cost curves: factories of fixed size SRAC 1 SRAC 3 SRAC 2 SRAC 4 SRAC 5 Costs Output O 5 factories 4 factories Copyright 2001 Pearson Education Australia
  • 38. Constructing long-run average cost curves: factories of fixed size SRAC 1 SRAC 3 SRAC 2 SRAC 4 SRAC 5 LRAC Costs Output O Copyright 2001 Pearson Education Australia
  • 39. Assuming a virtually unlimited number of plant sizes, LRAC curve takes on a smoother shape LRAC Costs Output O Copyright 2001 Pearson Education Australia

×