This document discusses the different types of costs that firms face, including:
- Fixed costs that do not vary with output levels
- Variable costs that vary with output
- Short-run costs determined by production technology and returns to scale
- Long-run costs including the user cost of capital which is depreciation plus the interest rate times the value of capital
It provides examples of cost curves and how costs change with varying levels of output in the short-run and considerations for minimizing costs through optimal input choices in the long-run.
This document discusses production and the factors that influence a firm's production decisions. It covers the technology of production, production functions, isoquants, production with one and two variable inputs, and returns to scale. Key points include: isoquants show combinations of inputs that produce the same output; production exhibits diminishing marginal returns; marginal rate of technical substitution diminishes as one input is substituted for another; and inputs can exhibit varying degrees of substitutability from perfect to fixed proportions. The law of diminishing returns and how technological progress can increase productivity over time are also examined.
This document discusses production and cost concepts. It begins by listing learning outcomes related to production functions, costs, efficiency, and Cobb-Douglas production functions. It then covers short-run and long-run production functions, the law of diminishing returns, costs including total, average, and marginal costs, and the three stages of production. It provides examples of production functions and discusses the relationship between inputs and output as well as returns to scale.
This document discusses production economics concepts including short-run and long-run production functions, marginal product, average product, returns to scale, and cost minimization. It provides examples of production functions, calculates elasticities of output, and discusses estimating production functions from data. Managers must choose production methods to minimize costs while economists use tools like production functions to evaluate efficiency.
This document provides an overview of production costs, including:
1. It defines economic costs and profits, and distinguishes between explicit, implicit, accounting and economic costs.
2. It discusses short-run production costs like fixed, variable and total costs, and shows how average and marginal costs are derived from these.
3. It explores long-run production costs and how costs are affected by factors like returns to scale and indivisible inputs when expanding or contracting output levels.
The document discusses the theory of producer behavior and costs. It defines key concepts like production functions, returns to scale, and costs including fixed, variable, average, marginal, and total costs. It explains the relationships between these different cost concepts and how average and marginal costs change with output quantity. Cost curves like average total cost are also examined and shown to typically be U-shaped. Factors that influence costs like diminishing marginal returns are explained. Profit maximization when marginal revenue equals marginal cost is also covered.
This document discusses production and the factors that influence a firm's production decisions. It covers the technology of production, production functions, isoquants, production with one and two variable inputs, and returns to scale. Key points include: isoquants show combinations of inputs that produce the same output level; production exhibits diminishing marginal returns; marginal product initially increases with additional input but eventually decreases; labor productivity and technological improvements have allowed food supply to outpace population growth, contradicting Malthus' predictions.
This document discusses cost analysis and contains the following key points:
1. Cost analysis is important for managers to find lower cost production methods and compete against firms with lower costs. It examines concepts like fixed, variable, average, and marginal costs.
2. Short-run and long-run cost functions are presented, showing relationships between costs and output. Economies of scale can cause long-run average costs to decline with increased output up to a point.
3. The Cobb-Douglas production function is described and used to derive long-run cost functions based on factor inputs and returns to scale. Constant, increasing, and decreasing returns to scale impact the shape of the long-run average cost curve
This document discusses production costs and functions. It covers:
1. Short-run and long-run production, where factors of production are fixed in the short-run. Diminishing returns can occur in the short-run as adding more variable inputs yields lower marginal products.
2. Returns to scale in the long-run, where all factors are variable. Increasing, decreasing, and constant returns to scale depend on the relationship between input and output percentage changes.
3. Cost concepts including fixed, variable, average, marginal, and total costs. Fixed costs do not vary with output while variable costs do. Marginal cost is the change in total cost from one extra unit of output.
This document discusses production and the factors that influence a firm's production decisions. It covers the technology of production, production functions, isoquants, production with one and two variable inputs, and returns to scale. Key points include: isoquants show combinations of inputs that produce the same output; production exhibits diminishing marginal returns; marginal rate of technical substitution diminishes as one input is substituted for another; and inputs can exhibit varying degrees of substitutability from perfect to fixed proportions. The law of diminishing returns and how technological progress can increase productivity over time are also examined.
This document discusses production and cost concepts. It begins by listing learning outcomes related to production functions, costs, efficiency, and Cobb-Douglas production functions. It then covers short-run and long-run production functions, the law of diminishing returns, costs including total, average, and marginal costs, and the three stages of production. It provides examples of production functions and discusses the relationship between inputs and output as well as returns to scale.
This document discusses production economics concepts including short-run and long-run production functions, marginal product, average product, returns to scale, and cost minimization. It provides examples of production functions, calculates elasticities of output, and discusses estimating production functions from data. Managers must choose production methods to minimize costs while economists use tools like production functions to evaluate efficiency.
This document provides an overview of production costs, including:
1. It defines economic costs and profits, and distinguishes between explicit, implicit, accounting and economic costs.
2. It discusses short-run production costs like fixed, variable and total costs, and shows how average and marginal costs are derived from these.
3. It explores long-run production costs and how costs are affected by factors like returns to scale and indivisible inputs when expanding or contracting output levels.
The document discusses the theory of producer behavior and costs. It defines key concepts like production functions, returns to scale, and costs including fixed, variable, average, marginal, and total costs. It explains the relationships between these different cost concepts and how average and marginal costs change with output quantity. Cost curves like average total cost are also examined and shown to typically be U-shaped. Factors that influence costs like diminishing marginal returns are explained. Profit maximization when marginal revenue equals marginal cost is also covered.
This document discusses production and the factors that influence a firm's production decisions. It covers the technology of production, production functions, isoquants, production with one and two variable inputs, and returns to scale. Key points include: isoquants show combinations of inputs that produce the same output level; production exhibits diminishing marginal returns; marginal product initially increases with additional input but eventually decreases; labor productivity and technological improvements have allowed food supply to outpace population growth, contradicting Malthus' predictions.
This document discusses cost analysis and contains the following key points:
1. Cost analysis is important for managers to find lower cost production methods and compete against firms with lower costs. It examines concepts like fixed, variable, average, and marginal costs.
2. Short-run and long-run cost functions are presented, showing relationships between costs and output. Economies of scale can cause long-run average costs to decline with increased output up to a point.
3. The Cobb-Douglas production function is described and used to derive long-run cost functions based on factor inputs and returns to scale. Constant, increasing, and decreasing returns to scale impact the shape of the long-run average cost curve
This document discusses production costs and functions. It covers:
1. Short-run and long-run production, where factors of production are fixed in the short-run. Diminishing returns can occur in the short-run as adding more variable inputs yields lower marginal products.
2. Returns to scale in the long-run, where all factors are variable. Increasing, decreasing, and constant returns to scale depend on the relationship between input and output percentage changes.
3. Cost concepts including fixed, variable, average, marginal, and total costs. Fixed costs do not vary with output while variable costs do. Marginal cost is the change in total cost from one extra unit of output.
This document discusses breakeven analysis in engineering economy. It defines key concepts like fixed and variable costs, price, recurring and nonrecurring costs. It also explains linear and nonlinear breakeven analysis models. Examples are provided to demonstrate how to calculate breakeven quantity and maximize savings using these models. The document also defines other economic concepts like overhead costs, opportunity costs and time value of money analysis.
This document provides an overview of production and costs from an economics textbook. It discusses key concepts such as:
- The production function which shows the relationship between a firm's inputs and outputs. Inputs are categorized as fixed or variable.
- Total, average, and marginal product curves which show output levels as a single input is varied, demonstrating the law of diminishing returns. There are three stages of production as inputs increase.
- Explicit and implicit costs of production. Short-run costs include total fixed, total variable, and total costs. Long-run costs have no fixed component.
- Average and marginal cost curves which are U-shaped in the short-run as output increases. Minimum efficient scale
Theory of production describes the relationship between inputs and outputs in the production process. A production function defines this relationship mathematically. In the short run, some inputs are fixed while others are variable. As the variable input increases, total output initially increases at an increasing rate (stage 1), then at a decreasing rate (stage 2), and eventually decreases (stage 3), following the law of variable proportions. In the long run, all inputs are variable. If all inputs increase proportionately, we can see increasing, constant, or decreasing returns to scale. Isoquants show the combinations of inputs that produce the same output level.
This document defines and provides examples of non-linear functions used in economic analysis, including quadratic, cubic, exponential and logarithmic functions. It then discusses how these non-linear functions can be used to model demand, supply and market equilibrium. Examples are provided to show how taxes and subsidies impact the equilibrium price and quantity in a market modeled using non-linear functions. The document also defines cost functions including fixed cost, variable cost, total cost, average fixed cost, average variable cost and marginal cost. Worked examples demonstrate how to apply these concepts.
The marginal productivity theory of distribution Prabha Panth
The document discusses the neoclassical theory of distribution and the concept of factor payments. It addresses the "adding up" problem of whether total factor payments will equal total product. Wicksteed showed that under constant returns to scale and factors paid their marginal products, total revenue will equal total costs through Euler's theorem. However, this assumes a linear homogeneous production function. Later economists like Samuelson and Hicks found the condition is only met at the minimum point of the long-run average cost curve, where a firm has constant returns to scale.
This document provides information about break even analysis including definitions of key terms like fixed cost, variable cost, selling price, break even point, contribution margin, and profit volume ratio. It also includes examples of break even analysis questions from past competitive exams. The document aims to explain the concept and calculations of break even analysis and how it can be used as a management decision making tool.
This document discusses cost functions and different types of costs faced by firms. It covers:
1. Accounting costs refer to explicit payments like wages, rent, etc. Economic costs also include opportunity costs of inputs.
2. Firms minimize costs by choosing the optimal input combination given input prices to produce a certain output level. This allows deriving the total cost function TC(Q).
3. Short-run costs are analyzed assuming one input is fixed, while long-run all inputs are variable. The envelope of short-run total cost curves defines the total cost curve facing the firm.
This document discusses government policies related to competitive markets. It begins by defining consumer surplus and producer surplus, which are used to evaluate the gains and losses from policies. Price controls are examined as an example, showing the deadweight loss. Other topics covered include the efficiency of competitive markets; minimum prices; price supports and production quotas; import quotas and tariffs; and the impact of taxes and subsidies. Specific examples analyzed include price controls on natural gas and policies related to kidney markets.
This document provides an outline and overview of input demand in labor and land markets. It discusses key concepts like derived demand, diminishing returns, and marginal revenue product. It examines how firms determine demand for inputs like labor based on marginal revenue product exceeding input prices. Demand for land is determined similarly based on the value of output produced. The document outlines factors that can shift input demand curves, like changes in output demand, input prices, and technology.
This document discusses key concepts related to production including factors of production, production functions, laws of diminishing returns, costs of production, and economies of scale. It defines factors of production as land, labor, capital, and entrepreneurship. Production functions explain how inputs like fixed and variable factors are transformed into outputs. The law of diminishing returns states that beyond a certain point, additional units of a variable input like labor will yield lower marginal products. Costs include total, fixed, variable, average, and marginal costs, and how they relate affects long and short run production. Economies of scale can come from external or internal factors that lower average costs for firms.
Direct and indirect costs must be estimated for engineering projects. Common direct cost estimation techniques include the unit method, cost indexes, and cost-estimating relationships. Indirect costs can comprise 25-50% of total costs and are traditionally allocated using predetermined rates. Activity-based costing is a more accurate method that uses cost drivers to allocate indirect costs to cost centers. Ethical practices, like avoiding deception, are important for creating unbiased cost estimates.
- Firms demand inputs based on the demand for the outputs they can produce. Inputs are complementary or substitutable, and subject to diminishing returns.
- A firm will demand an input as long as its marginal revenue product exceeds its cost. For a single variable input like labor, the marginal revenue product curve determines the firm's demand in the short run.
- When a factor price changes, firms substitute toward cheaper inputs but also adjust output, affecting demand for all inputs. Higher wages induce substitution from labor to capital through technology changes.
- Firms demand inputs based on the demand for the outputs those inputs can produce. Inputs are complementary or substitutable, and subject to diminishing returns.
- A firm will demand an input as long as its marginal revenue product exceeds its cost. For a single variable input like labor, the firm's demand curve is the marginal revenue product curve.
- When a firm uses multiple variable inputs, a change in input price causes substitution and output effects that impact factor demand. The firm will substitute cheaper factors for more expensive ones.
The document discusses production decisions made by firms. It covers the technology of production using production functions to show output levels from different input combinations. It also discusses production with one variable input (labor) and how marginal product and average product change with increasing labor input. Finally, it discusses production with two variable inputs (labor and capital), using isoquants to show input combinations that produce the same output level and concepts like marginal rate of technical substitution and returns to scale.
This document discusses the product exhaustion theorem, which states that when factors of production are paid their marginal products, their payments will exactly equal total product. It provides an overview of Euler's theorem, the assumptions of the theorem, and criticisms of the theory. Clark's product exhaustion theorem is also explained, which uses diagrams to show how total product is exhausted between payments to labor and capital under conditions of perfect competition.
1) The document summarizes key concepts from Chapter 3 of a macroeconomics textbook, including how total national income is determined by aggregate supply and demand.
2) It explains how factor prices like wages and rental rates are determined by supply and demand in factor markets and how this determines the distribution of total income.
3) It outlines the components of aggregate demand - consumption, investment, and government spending - and how their interaction with aggregate supply determines equilibrium in the goods market and the loanable funds market.
This document discusses theories of costs in the short run and long run for firms. It defines fixed costs as expenses that do not change with output, and variable costs as expenses that change proportionally with output. In the short run, total costs are the sum of fixed and variable costs. In the long run, when all costs are variable, the long run average cost curve is derived from the minimum points of multiple short run average cost curves and can exhibit economies or diseconomies of scale.
This chapter discusses the costs of production for a firm. It explains the differences between fixed and variable costs, as well as how average and marginal costs are determined. In the short run, costs are influenced by increasing or decreasing returns. In the long run, the user cost of capital must be considered. Cost curves, including total, average, and marginal costs are presented to show how costs change with different levels of output.
The firm is an economic institution that transforms factors of production into consumer goods – it:
Organizes factors of production.
Produces goods and services.
Sells produced goods and services.
The document discusses cost theory concepts including opportunity costs, explicit and implicit costs, short-run and long-run costs, fixed and variable costs, total cost, average cost, and marginal cost. It explains how average, marginal, and total costs are related and how their curves are shaped. Specifically, it summarizes that marginal cost and short-run average cost curves slope upward due to diminishing returns, while the long-run average cost curve is U-shaped as economies of scale initially lower costs but diseconomies later raise them. The envelope relationship shows that short-run average costs are always above the minimum long-run average cost.
The document discusses the costs of production for a firm. It defines fixed costs as costs that do not vary with output, variable costs as costs that vary with output, and total costs as the sum of fixed and variable costs. Marginal cost is defined as the change in total cost from producing one additional unit of output. In the short run, costs are classified as either fixed or variable, but in the long run most costs can become variable. Cost curves like average total cost, average variable cost, and marginal cost are discussed and how they relate to costs and production levels.
This document discusses breakeven analysis in engineering economy. It defines key concepts like fixed and variable costs, price, recurring and nonrecurring costs. It also explains linear and nonlinear breakeven analysis models. Examples are provided to demonstrate how to calculate breakeven quantity and maximize savings using these models. The document also defines other economic concepts like overhead costs, opportunity costs and time value of money analysis.
This document provides an overview of production and costs from an economics textbook. It discusses key concepts such as:
- The production function which shows the relationship between a firm's inputs and outputs. Inputs are categorized as fixed or variable.
- Total, average, and marginal product curves which show output levels as a single input is varied, demonstrating the law of diminishing returns. There are three stages of production as inputs increase.
- Explicit and implicit costs of production. Short-run costs include total fixed, total variable, and total costs. Long-run costs have no fixed component.
- Average and marginal cost curves which are U-shaped in the short-run as output increases. Minimum efficient scale
Theory of production describes the relationship between inputs and outputs in the production process. A production function defines this relationship mathematically. In the short run, some inputs are fixed while others are variable. As the variable input increases, total output initially increases at an increasing rate (stage 1), then at a decreasing rate (stage 2), and eventually decreases (stage 3), following the law of variable proportions. In the long run, all inputs are variable. If all inputs increase proportionately, we can see increasing, constant, or decreasing returns to scale. Isoquants show the combinations of inputs that produce the same output level.
This document defines and provides examples of non-linear functions used in economic analysis, including quadratic, cubic, exponential and logarithmic functions. It then discusses how these non-linear functions can be used to model demand, supply and market equilibrium. Examples are provided to show how taxes and subsidies impact the equilibrium price and quantity in a market modeled using non-linear functions. The document also defines cost functions including fixed cost, variable cost, total cost, average fixed cost, average variable cost and marginal cost. Worked examples demonstrate how to apply these concepts.
The marginal productivity theory of distribution Prabha Panth
The document discusses the neoclassical theory of distribution and the concept of factor payments. It addresses the "adding up" problem of whether total factor payments will equal total product. Wicksteed showed that under constant returns to scale and factors paid their marginal products, total revenue will equal total costs through Euler's theorem. However, this assumes a linear homogeneous production function. Later economists like Samuelson and Hicks found the condition is only met at the minimum point of the long-run average cost curve, where a firm has constant returns to scale.
This document provides information about break even analysis including definitions of key terms like fixed cost, variable cost, selling price, break even point, contribution margin, and profit volume ratio. It also includes examples of break even analysis questions from past competitive exams. The document aims to explain the concept and calculations of break even analysis and how it can be used as a management decision making tool.
This document discusses cost functions and different types of costs faced by firms. It covers:
1. Accounting costs refer to explicit payments like wages, rent, etc. Economic costs also include opportunity costs of inputs.
2. Firms minimize costs by choosing the optimal input combination given input prices to produce a certain output level. This allows deriving the total cost function TC(Q).
3. Short-run costs are analyzed assuming one input is fixed, while long-run all inputs are variable. The envelope of short-run total cost curves defines the total cost curve facing the firm.
This document discusses government policies related to competitive markets. It begins by defining consumer surplus and producer surplus, which are used to evaluate the gains and losses from policies. Price controls are examined as an example, showing the deadweight loss. Other topics covered include the efficiency of competitive markets; minimum prices; price supports and production quotas; import quotas and tariffs; and the impact of taxes and subsidies. Specific examples analyzed include price controls on natural gas and policies related to kidney markets.
This document provides an outline and overview of input demand in labor and land markets. It discusses key concepts like derived demand, diminishing returns, and marginal revenue product. It examines how firms determine demand for inputs like labor based on marginal revenue product exceeding input prices. Demand for land is determined similarly based on the value of output produced. The document outlines factors that can shift input demand curves, like changes in output demand, input prices, and technology.
This document discusses key concepts related to production including factors of production, production functions, laws of diminishing returns, costs of production, and economies of scale. It defines factors of production as land, labor, capital, and entrepreneurship. Production functions explain how inputs like fixed and variable factors are transformed into outputs. The law of diminishing returns states that beyond a certain point, additional units of a variable input like labor will yield lower marginal products. Costs include total, fixed, variable, average, and marginal costs, and how they relate affects long and short run production. Economies of scale can come from external or internal factors that lower average costs for firms.
Direct and indirect costs must be estimated for engineering projects. Common direct cost estimation techniques include the unit method, cost indexes, and cost-estimating relationships. Indirect costs can comprise 25-50% of total costs and are traditionally allocated using predetermined rates. Activity-based costing is a more accurate method that uses cost drivers to allocate indirect costs to cost centers. Ethical practices, like avoiding deception, are important for creating unbiased cost estimates.
- Firms demand inputs based on the demand for the outputs they can produce. Inputs are complementary or substitutable, and subject to diminishing returns.
- A firm will demand an input as long as its marginal revenue product exceeds its cost. For a single variable input like labor, the marginal revenue product curve determines the firm's demand in the short run.
- When a factor price changes, firms substitute toward cheaper inputs but also adjust output, affecting demand for all inputs. Higher wages induce substitution from labor to capital through technology changes.
- Firms demand inputs based on the demand for the outputs those inputs can produce. Inputs are complementary or substitutable, and subject to diminishing returns.
- A firm will demand an input as long as its marginal revenue product exceeds its cost. For a single variable input like labor, the firm's demand curve is the marginal revenue product curve.
- When a firm uses multiple variable inputs, a change in input price causes substitution and output effects that impact factor demand. The firm will substitute cheaper factors for more expensive ones.
The document discusses production decisions made by firms. It covers the technology of production using production functions to show output levels from different input combinations. It also discusses production with one variable input (labor) and how marginal product and average product change with increasing labor input. Finally, it discusses production with two variable inputs (labor and capital), using isoquants to show input combinations that produce the same output level and concepts like marginal rate of technical substitution and returns to scale.
This document discusses the product exhaustion theorem, which states that when factors of production are paid their marginal products, their payments will exactly equal total product. It provides an overview of Euler's theorem, the assumptions of the theorem, and criticisms of the theory. Clark's product exhaustion theorem is also explained, which uses diagrams to show how total product is exhausted between payments to labor and capital under conditions of perfect competition.
1) The document summarizes key concepts from Chapter 3 of a macroeconomics textbook, including how total national income is determined by aggregate supply and demand.
2) It explains how factor prices like wages and rental rates are determined by supply and demand in factor markets and how this determines the distribution of total income.
3) It outlines the components of aggregate demand - consumption, investment, and government spending - and how their interaction with aggregate supply determines equilibrium in the goods market and the loanable funds market.
This document discusses theories of costs in the short run and long run for firms. It defines fixed costs as expenses that do not change with output, and variable costs as expenses that change proportionally with output. In the short run, total costs are the sum of fixed and variable costs. In the long run, when all costs are variable, the long run average cost curve is derived from the minimum points of multiple short run average cost curves and can exhibit economies or diseconomies of scale.
This chapter discusses the costs of production for a firm. It explains the differences between fixed and variable costs, as well as how average and marginal costs are determined. In the short run, costs are influenced by increasing or decreasing returns. In the long run, the user cost of capital must be considered. Cost curves, including total, average, and marginal costs are presented to show how costs change with different levels of output.
The firm is an economic institution that transforms factors of production into consumer goods – it:
Organizes factors of production.
Produces goods and services.
Sells produced goods and services.
The document discusses cost theory concepts including opportunity costs, explicit and implicit costs, short-run and long-run costs, fixed and variable costs, total cost, average cost, and marginal cost. It explains how average, marginal, and total costs are related and how their curves are shaped. Specifically, it summarizes that marginal cost and short-run average cost curves slope upward due to diminishing returns, while the long-run average cost curve is U-shaped as economies of scale initially lower costs but diseconomies later raise them. The envelope relationship shows that short-run average costs are always above the minimum long-run average cost.
The document discusses the costs of production for a firm. It defines fixed costs as costs that do not vary with output, variable costs as costs that vary with output, and total costs as the sum of fixed and variable costs. Marginal cost is defined as the change in total cost from producing one additional unit of output. In the short run, costs are classified as either fixed or variable, but in the long run most costs can become variable. Cost curves like average total cost, average variable cost, and marginal cost are discussed and how they relate to costs and production levels.
The document discusses cost theory and the different types of costs firms face. It explains that in the short-run, total cost is the sum of fixed and variable costs. Average costs like average fixed cost, average variable cost, and average total cost are defined. In the long-run, all costs are variable. Economies and diseconomies of scale impact the long-run average cost curve shape. The envelope relationship shows that short-run average costs are always above the long-run average cost curve.
Farmers can produce crops using different combinations of capital and labor. In the US, crops are typically grown using capital-intensive technology, while in developing countries crops are grown using more labor-intensive production. Isoquants can show the different options for crop production using different amounts of capital and labor.
This revision webinar focuses on the short run costs of businesses. It includes with examples a distinction between fixed and variable costs, average, marginal and total costs and short and long run costs.
The document discusses different types of costs firms face in both the short run and long run. It defines explicit costs as actual cash payments and implicit costs as opportunity costs. In the short run, some resources are fixed while others are variable. As more of the variable input is added, marginal product initially increases but eventually declines due to diminishing returns. In the long run, all inputs are variable and firms can choose different plant sizes, leading to economies or diseconomies of scale.
- The document discusses the concepts of accounting costs, economic costs, fixed costs, variable costs, and marginal costs from a firm's perspective.
- It provides an example of a factory owner, Alexander, who produces fishing lures, to illustrate how to calculate accounting profit versus economic profit based on the costs of production.
- Key costs discussed include explicit costs like wages versus implicit opportunity costs, how costs shape the short-run average and marginal cost curves, and the principle of diminishing returns.
This document discusses short-run costs and output decisions for firms. It defines various cost concepts like fixed costs, variable costs, total costs, average costs and marginal costs. It explains that in the short-run, firms face fixed costs that cannot be changed. It also discusses how firms determine the profit-maximizing level of output by producing at the point where marginal revenue equals marginal cost. The marginal cost curve represents a firm's short-run supply curve in perfect competition.
The document describes costs for three firms over different quantities of output.
Firm A experiences economies of scale as its long-run average cost continuously declines as output increases. Economies of scale occur when output increases by a greater proportion than inputs, so that average costs fall with scale.
Diseconomies of scale happen when output rises less than inputs, causing average costs to increase with scale. Firm A is the only one that sees LRAC decline throughout, indicating it benefits from economies of scale.
This document discusses key concepts related to business costs including:
1. It defines economic costs, accounting costs, and sunk costs.
2. It explains the differences between short-run and long-run costs, and how total, average, and marginal costs are calculated in each time period.
3. It provides examples of cost schedules and diagrams cost curves, discussing their characteristics and relationships.
The document discusses the costs of production for firms. It defines different types of costs including fixed costs, variable costs, total costs, average costs, and marginal costs. Fixed costs remain constant regardless of the amount of output, while variable costs change with output. Total cost is the sum of fixed and variable costs. The document also discusses how cost curves like total cost, average cost, and marginal cost shift when costs or technology change.
This document discusses different types of costs involved in production, including:
- Explicit costs which are actual payments, versus implicit costs which are work done without monetary payment
- Private costs accrued by firms/individuals engaged in an activity, versus external/social costs passed to society
- Sunk costs which cannot be recovered and should be ignored in decisions
- Money costs which are payments to factors of production
- Opportunity cost as the next best alternative foregone in producing something
It also explains concepts like fixed costs, variable costs, total costs, average costs and marginal cost, and how they relate in the short-run and long-run, including economies and diseconomies of scale. Diagrams are used to depict
The document discusses theories of costs in the short run and long run for firms. In the short run, costs are classified as fixed or variable. Fixed costs do not change with output while variable costs do change with output. In the long run, nothing is fixed. Long run average cost (LRAC) curves illustrate average costs when all factors of production can be varied. LRAC curves are U-shaped and reflect economies of scale at low outputs and diseconomies of scale at high outputs. LRAC curves envelop multiple short run average cost curves as firms choose the optimal factory size.
This document discusses different types of costs including fixed costs, variable costs, average costs, and marginal costs. It provides examples of each type of cost and explains how they relate to total cost, average cost, and profit analysis. The key points made include:
- Fixed costs do not depend on output while variable costs do depend on output. Total cost is the sum of fixed and variable costs.
- Average cost is total cost divided by output and depends on the ratio of fixed costs to output. Marginal cost is the change in total cost from a one unit change in output and depends only on variable costs.
- The relationship between average cost, marginal cost, and output determines if a company experiences economies of
This document discusses various concepts related to cost theory and analysis. It defines different types of costs such as actual, opportunity, explicit, implicit, fixed, variable, accounting, economic, marginal, incremental, sunk, private, social, original, and replacement costs. It also discusses cost functions, the relationship between production and costs in the short-run and long-run, cost curves like total, average, and marginal costs. Finally, it covers special topics like profit contribution analysis, break-even analysis, operating leverage, learning curves, and economies of scope.
Microeconomics-The cost of production.pptmayamonfori
The document discusses the costs of production, including:
1) It defines key terms like total cost, fixed cost, variable cost, average costs, and marginal cost and shows how they relate through examples.
2) The first example illustrates a farmer's production function and how costs like labor vary with quantity produced in the short run.
3) The second example more generally shows how average and marginal costs behave as quantity increases, with the average total cost curve typically being U-shaped.
There are two types of economic costs: explicit costs which are actual expenditures and implicit costs which are the value of factors owned by the firm. Short-run costs include fixed costs which do not vary with output and variable costs which do vary with output. Total cost is the sum of fixed and variable costs. Marginal cost is the change in total cost from producing one additional unit of output. Average costs include average fixed cost, average variable cost, and average total cost.
This document summarizes a study that determined the water requirements, crop coefficients, and effects of deficit irrigation on hot pepper growth. The study found that:
1) Hot pepper requires about 587mm of water over the growing season under full irrigation.
2) The crop coefficients at different growth stages under full irrigation were 0.47, 0.86, 1.42, and 0.91.
3) Deficit irrigation of up to 20% (80% water requirement) had no significant effects on pepper growth, development, or fruiting.
Proposal ini membahas rencana pengembangan sistem informasi manajemen jemaat dan keuangan Gereja Kristen Indonesia. Sistem ini dirancang untuk mengelola data jemaat, kegiatan, dan keuangan gereja serta menyajikan laporan statistik. Spesifikasi sistem dan rencana pelaksanaan pengembangan sistem dalam proposal ini mencakup tahapan analisis kebutuhan, desain, pengujian, hingga implementasi.
Dokumen tersebut merupakan laporan praktikum mahasiswa Fakultas Pertanian Universitas Gadjah Mada mengenai Dasar-Dasar Penyuluhan dan Komunikasi Pertanian. Laporan tersebut berisi analisis artikel dari situs web/blog yang meliputi nilai penyuluhan, sumber teknologi/ide, sasaran, manfaat, dan nilai pendidikan yang terkandung dalam artikel tersebut. Mahasiswa diminta untuk menuliskan ringkasan dan penjelasan nilai ber
Ringkasan dokumen tersebut adalah:
1. Dokumen tersebut merupakan contoh proposal penelitian yang menguji pengaruh nilai tukar rupiah dan suku bunga terhadap cadangan primer dan kredit bank Mandiri.
2. Tujuan penelitian adalah menganalisis pengaruh nilai tukar rupiah dan suku bunga terhadap dua variabel tersebut.
3. Metodologi penelitian menggunakan data sekunder dari berbagai sumber untuk variabel terikat
Dokumen tersebut membahas tentang ekofisiologi pertumbuhan dan hasil tanaman teh. Terdapat tiga proses utama yang berkaitan dengan hasil teh yaitu fotosintesis, pertumbuhan pucuk, dan hubungan air tanaman. Fotosintesis dipengaruhi oleh kadar nitrogen dan intensitas cahaya, dimana tingkat maksimum cahaya yang menyebabkan kejenuhan fotosintesis bervariasi antar genotipe.
Analisis Sistem Pemanfaatan Lahan Pertanian (ALUSA) digunakan untuk mengevaluasi kesesuaian lahan untuk penggunaan lahan tertentu dengan mempertimbangkan faktor-faktor fisik, sosial, dan ekonomi guna perencanaan penggunaan lahan yang berkelanjutan. ALUSA melibatkan survei sumber daya alam, penentuan satuan pemetaan lahan, identifikasi tipe penggunaan lahan yang relevan, dan klasifikasi kesesuaian lahan
Dokumen tersebut membahas tentang konsep keanekaragaman hayati (biodiversity) yang mencakup tingkat genetik, spesies, dan ekosistem. Dokumen juga menjelaskan pentingnya melestarikan biodiversity karena bermanfaat bagi makanan, obat-obatan, dan kemampuan alam dalam beradaptasi dengan perubahan lingkungan. Sayangnya, berbagai ancaman seperti kerusakan habitat, polusi, perubahan iklim, dan overeksploitasi sumber daya
Dokumen tersebut memberikan penjelasan mengenai site dan mode of action dari herbisida. Secara singkat:
1. Herbisida dapat masuk ke tumbuhan melalui permukaan daun dan akar, lalu diangkut ke seluruh bagian tumbuhan.
2. Herbisida bekerja dengan merusak proses fisiologi seperti pembelahan sel, pembentukan jaringan, dan metabolisme seperti fotosintesis dan pernafasan.
3. Efek herbisida bergantung pada l
Dokumen tersebut membahas tentang peran seed bank sebagai penyimpan biji gulma dan faktor-faktor yang mempengaruhinya. Seed bank berperan sebagai penyimpan biji gulma untuk musim berikutnya, agen penyebaran gulma, dan perlindungan biji selama kondisi tidak menguntungkan. Produksi biji gulma dipengaruhi oleh karakteristik gulma semusim dan faktor lingkungan seperti hara, kelembaban, dan penyinaran. Pengol
Dokumen tersebut membahas program manajemen gulma yang terintegrasi dengan tiga komponen utama yaitu pencegahan, pengendalian, dan pengurangan kompetisi gulma-tanaman. Program tersebut mencakup upaya budidaya tanaman, pengolahan tanah, dan pengendalian gulma untuk mengurangi produksi biji dan propagule gulma serta mencegah tumbuhnya gulma di pertanaman.
The document discusses the relationship between photosynthetic capacity and tea yield. While some studies found no direct link, others argue that assimilate supply can limit yield under conditions like photoinhibition. Tea yield is primarily controlled by shoot initiation and extension rates, which are influenced by temperature, vapor pressure deficit, and shoot turgor rather than current photosynthetic rates. However, time-integrated photosynthesis and yield may be positively correlated. Respiration rates are also high in tea plants, with up to 85% of photosynthates used for respiration rather than growth.
Dokumen tersebut membahas tentang niche differentiation dan suksesi gulma dalam komunitas tumbuhan. Beberapa poin penting yang dijelaskan adalah perbedaan distribusi vertikal dan horizontal antar spesies dalam komunitas, prinsip kompetisi Gause, dan model-model suksesi vegetasi seperti model fasilitasi, toleransi, dan inhibisi berdasarkan tekanan kompetisi antar spesies. "
Dokumen tersebut membahas tentang mata kuliah Manajemen Gulma pada Fakultas Pertanian UGM. Mata kuliah ini akan membahas tentang seed bank dan suksesi komunitas gulma, interaksi antara gulma dan tanaman, serta program-program manajemen gulma yang efisien. Dokumen juga menjelaskan definisi gulma dan ekologi gulma beserta faktor-faktor lingkungan yang mempengaruhinya. Interaksi antara gulma dan tanaman dalam memperebutkan sum
This document discusses the relationship between photosynthetic capacity and tea yield. While some studies found no direct link, others argue that assimilate supply can limit yield under certain conditions like photoinhibition. Tea yield is primarily controlled by shoot initiation and extension rates, which are influenced by temperature, vapor pressure deficit, and shoot turgor rather than current photosynthetic rates. Respiration rates are also high in tea plants, consuming over half of photosynthates. Root systems vary between seedlings and clones, with depth being an important factor in drought tolerance. Water use in tea is determined by the balance between water absorption and transpiration.
Pertanian berkelanjutan melibatkan pengelolaan sumber daya alam secara bijaksana untuk memenuhi kebutuhan manusia saat ini tanpa mengorbankan kemampuan generasi masa depan. Pertanian harus memperhatikan aspek ekologi, ekonomi, dan sosial untuk dapat berlangsung secara berkelanjutan. Tantangan utama adalah bagaimana memenuhi kebutuhan manusia tanpa merusak lingkungan.
How to Make a Field Mandatory in Odoo 17Celine George
In Odoo, making a field required can be done through both Python code and XML views. When you set the required attribute to True in Python code, it makes the field required across all views where it's used. Conversely, when you set the required attribute in XML views, it makes the field required only in the context of that particular view.
বাংলাদেশের অর্থনৈতিক সমীক্ষা ২০২৪ [Bangladesh Economic Review 2024 Bangla.pdf] কম্পিউটার , ট্যাব ও স্মার্ট ফোন ভার্সন সহ সম্পূর্ণ বাংলা ই-বুক বা pdf বই " সুচিপত্র ...বুকমার্ক মেনু 🔖 ও হাইপার লিংক মেনু 📝👆 যুক্ত ..
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তাই একজন নাগরিক হিসাবে এই তথ্য গুলো আপনার জানা প্রয়োজন ...।
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The simplified electron and muon model, Oscillating Spacetime: The Foundation...RitikBhardwaj56
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This presentation was provided by Steph Pollock of The American Psychological Association’s Journals Program, and Damita Snow, of The American Society of Civil Engineers (ASCE), for the initial session of NISO's 2024 Training Series "DEIA in the Scholarly Landscape." Session One: 'Setting Expectations: a DEIA Primer,' was held June 6, 2024.
A workshop hosted by the South African Journal of Science aimed at postgraduate students and early career researchers with little or no experience in writing and publishing journal articles.
This presentation includes basic of PCOS their pathology and treatment and also Ayurveda correlation of PCOS and Ayurvedic line of treatment mentioned in classics.
2. Chapter 7 Slide 2
Topics to be Discussed
Measuring Cost: Which Costs Matter?
Cost in the Short Run
Cost in the Long Run
Long-Run Versus Short-Run Cost
Curves
3. Chapter 7 Slide 3
Topics to be Discussed
Production with Two Outputs--
Economies of Scope
Dynamic Changes in Costs--The
Learning Curve
Estimating and Predicting Cost
4. Chapter 7 Slide 4
Introduction
The production technology measures
the relationship between input and
output.
Given the production technology,
managers must choose how to
produce.
5. Chapter 7 Slide 5
Introduction
To determine the optimal level of
output and the input combinations, we
must convert from the unit
measurements of the production
technology to dollar measurements or
costs.
6. Chapter 7 Slide 6
Measuring Cost:
Which Costs Matter?
Accounting Cost
Actual expenses plus depreciation
charges for capital equipment
Economic Cost
Cost to a firm of utilizing economic
resources in production, including
opportunity cost
Economic Cost vs. Accounting CostEconomic Cost vs. Accounting Cost
7. Chapter 7 Slide 7
Opportunity cost.
Cost associated with opportunities that
are foregone when a firm’s resources
are not put to their highest-value use.
Measuring Cost:
Which Costs Matter?
8. Chapter 7 Slide 8
An Example
A firm owns its own building and pays no
rent for office space
Does this mean the cost of office space
is zero?
Measuring Cost:
Which Costs Matter?
9. Chapter 7 Slide 9
Sunk Cost
Expenditure that has been made and
cannot be recovered
Should not influence a firm’s decisions.
Measuring Cost:
Which Costs Matter?
10. Chapter 7 Slide
An Example
A firm pays $500,000 for an option to buy a
building.
The cost of the building is $5 million or a total of
$5.5 million.
The firm finds another building for $5.25 million.
Which building should the firm buy?
Measuring Cost:
Which Costs Matter?
11. Chapter 7 Slide
Choosing the Location
for a New Law School Building
Northwestern University Law School
1) Current location in downtown
Chicago
2) Alternative location in Evanston
with the main campus
12. Chapter 7 Slide
Northwestern University Law School
3) Choosing a Site
Land owned in Chicago
Must purchase land in Evanston
Chicago location might appear
cheaper without considering the
opportunity cost of the downtown land
(i.e. what it could be sold for)
Choosing the Location
for a New Law School Building
13. Chapter 7 Slide
Northwestern University Law School
3) Choosing a Site
Chicago location chosen--very costly
Justified only if there is some intrinsic
values associated with being in
Chicago
If not, it was an inefficient decision if it
was based on the assumption that the
downtown land was “free”
Choosing the Location
for a New Law School Building
14. Chapter 7 Slide
Total output is a function of variable
inputs and fixed inputs.
Therefore, the total cost of production
equals the fixed cost (the cost of the
fixed inputs) plus the variable cost
(the cost of the variable inputs), or…
VCFCTC +=
Measuring Cost:
Which Costs Matter?
Fixed and Variable CostsFixed and Variable Costs
15. Chapter 7 Slide
Fixed Cost
Does not vary with the level of output
Variable Cost
Cost that varies as output varies
Measuring Cost:
Which Costs Matter?
Fixed and Variable CostsFixed and Variable Costs
16. Chapter 7 Slide
Fixed Cost
Cost paid by a firm that is in business
regardless of the level of output
Sunk Cost
Cost that have been incurred and cannot
be recovered
Measuring Cost:
Which Costs Matter?
17. Chapter 7 Slide
Personal Computers: most costs
are variable
Components, labor
Software: most costs are sunk
Cost of developing the software
Measuring Cost:
Which Costs Matter?
18. Chapter 7 Slide
Pizza
Largest cost component is fixed
Measuring Cost:
Which Costs Matter?
20. Chapter 7 Slide
Cost in the Short Run
Marginal Cost (MC) is the cost of
expanding output by one unit. Since
fixed cost have no impact on marginal
cost, it can be written as:
Q
TC
Q
VC
MC
∆
∆
=
∆
∆
=
21. Chapter 7 Slide
Cost in the Short Run
Average Total Cost (ATC) is the cost
per unit of output, or average fixed
cost (AFC) plus average variable cost
(AVC). This can be written:
Q
TVC
Q
TFC
ATC +=
22. Chapter 7 Slide
Cost in the Short Run
Average Total Cost (ATC) is the cost
per unit of output, or average fixed
cost (AFC) plus average variable cost
(AVC). This can be written:
Q
TC
orAVCAFCATC +=
23. Chapter 7 Slide
Cost in the Short Run
The Determinants of Short-Run Cost
The relationship between the production
function and cost can be exemplified by
either increasing returns and cost or
decreasing returns and cost.
24. Chapter 7 Slide
Cost in the Short Run
The Determinants of Short-Run Cost
Increasing returns and cost
With increasing returns, output is increasing
relative to input and variable cost and total
cost will fall relative to output.
Decreasing returns and cost
With decreasing returns, output is
decreasing relative to input and variable cost
and total cost will rise relative to output.
25. Chapter 7 Slide
Cost in the Short Run
For Example: Assume the wage rate
(w) is fixed relative to the number of
workers hired. Then:
Q
VC
MC
∆
∆
=
LVC w=
27. Chapter 7 Slide
Cost in the Short Run
Continuing:
L
MPL
∆
∆
=∆
Q
LMP
1
Q
L
Qunit1aforL
∆
=
∆
∆
=∆∆
28. Chapter 7 Slide
Cost in the Short Run
In conclusion:
…and a low marginal product (MP)
leads to a high marginal cost (MC)
and vise versa.
LMP
MC
w
=
29. Chapter 7 Slide
Cost in the Short Run
Consequently (from the table):
MC decreases initially with increasing
returns
0 through 4 units of output
MC increases with decreasing returns
5 through 11 units of output
31. Chapter 7 Slide
Cost Curves for a Firm
Output
Cost
($ per
year)
100
200
300
400
0 1 2 3 4 5 6 7 8 9 10 11 12 13
VC
Variable cost
increases with
production and
the rate varies with
increasing &
decreasing returns.
TC
Total cost
is the vertical
sum of FC
and VC.
FC50
Fixed cost does not
vary with output
32. Chapter 7 Slide
Cost Curves for a Firm
Output (units/yr.)
Cost
($ per
unit)
25
50
75
100
0 1 2 3 4 5 6 7 8 9 10 11
MC
ATC
AVC
AFC
33. Chapter 7 Slide
Cost Curves for a Firm
The line drawn from
the origin to the
tangent of the
variable cost curve:
Its slope equals AVC
The slope of a point
on VC equals MC
Therefore, MC = AVC
at 7 units of output
(point A)
Output
P
100
200
300
400
0 1 2 3 4 5 6 7 8 9 10 11 12 13
FC
VC
A
TC
34. Chapter 7 Slide
Cost Curves for a Firm
Unit Costs
AFC falls
continuously
When MC < AVC or
MC < ATC, AVC &
ATC decrease
When MC > AVC or
MC > ATC, AVC &
ATC increase Output (units/yr.)
Cost
($ per
unit)
25
50
75
100
0 1 2 3 4 5 6 7 8 9 10 11
MC
ATC
AVC
AFC
35. Chapter 7 Slide
Cost Curves for a Firm
Unit Costs
MC = AVC and ATC
at minimum AVC
and ATC
Minimum AVC
occurs at a lower
output than minimum
ATC due to FC
Output (units/yr.)
Cost
($ per
unit)
25
50
75
100
0 1 2 3 4 5 6 7 8 9 10 11
MC
ATC
AVC
AFC
36. Chapter 7 Slide
Operating Costs for Aluminum Smelting
($/Ton - based on an output of 600 tons/day)
Variable costs that are constant at all output levels
Electricity $316
Alumina 369
Other raw materials 125
Plant power and fuel 10
Subtotal $820
37. Chapter 7 Slide
Operating Costs for Aluminum Smelting
($/Ton - based on an output of 600 tons/day)
Variable costs that increase when output exceeds 600 tons/day
Labor $150
Maintenance 120
Freight 50
Subtotal $320
Total operating costs $1140
38. Chapter 7 Slide
The Short-Run Variable
Costs of Aluminum Smelting
Output (tons/day)
Cost
($ per ton)
1100
1200
1300
300 600 900
1140
MC
AVC
39. Chapter 7 Slide
Cost in the Long Run
User Cost of Capital = Economic
Depreciation + (Interest Rate)(Value
of Capital)
The User Cost of CapitalThe User Cost of Capital
40. Chapter 7 Slide
Cost in the Long Run
Example
Delta buys a Boeing 737 for $150 million
with an expected life of 30 years
Annual economic depreciation =
$150 million/30 = $5 million
Interest rate = 10%
The User Cost of CapitalThe User Cost of Capital
41. Chapter 7 Slide
Cost in the Long Run
Example
User Cost of Capital = $5 million + (.10)
($150 million – depreciation)
Year 1 = $5 million + (.10)
($150 million) = $20 million
Year 10 = $5 million + (.10)
($100 million) = $15 million
The User Cost of CapitalThe User Cost of Capital
42. Chapter 7 Slide
Cost in the Long Run
Rate per dollar of capital
r = Depreciation Rate + Interest Rate
The User Cost of CapitalThe User Cost of Capital
43. Chapter 7 Slide
Cost in the Long Run
Airline Example
Depreciation Rate = 1/30 = 3.33/yr
Rate of Return = 10%/yr
User Cost of Capital
r = 3.33 + 10 = 13.33%/yr
The User Cost of CapitalThe User Cost of Capital
44. Chapter 7 Slide
Cost in the Long Run
Assumptions
Two Inputs: Labor (L) & capital (K)
Price of labor: wage rate (w)
The price of capital
R = depreciation rate + interest rate
The Cost Minimizing Input ChoiceThe Cost Minimizing Input Choice
45. Chapter 7 Slide
Cost in the Long Run
Question
If capital was rented, would it change the
value of r ?
The User Cost of CapitalThe User Cost of CapitalThe Cost Minimizing Input ChoiceThe Cost Minimizing Input Choice
46. Chapter 7 Slide
Cost in the Long Run
The Isocost Line
C = wL + rK
Isocost: A line showing all combinations
of L & K that can be purchased for the
same cost
The User Cost of CapitalThe User Cost of CapitalThe Cost Minimizing Input ChoiceThe Cost Minimizing Input Choice
47. Chapter 7 Slide
Cost in the Long Run
Rewriting C as linear:
K = C/r - (w/r)L
Slope of the isocost:
is the ratio of the wage rate to rental cost of
capital.
This shows the rate at which capital can be
substituted for labor with no change in cost.
( )r
w
L
K −=
∆
∆
The Isocost LineThe Isocost Line
48. Chapter 7 Slide
Choosing Inputs
We will address how to minimize cost
for a given level of output.
We will do so by combining isocosts with
isoquants
49. Chapter 7 Slide
Producing a Given
Output at Minimum Cost
Labor per year
Capital
per
year
Isocost C2 shows quantity
Q1 can be produced with
combination K2L2 or K3L3.
However, both of these
are higher cost combinations
than K1L1.
Q1
Q1 is an isoquant
for output Q1.
Isocost curve C0 shows
all combinations of K and L
that can produce Q1 at this
cost level.
C0 C1 C2
CO C1 C2 are
three
isocost lines
A
K1
L1
K3
L3
K2
L2
50. Chapter 7 Slide
Input Substitution When
an Input Price Change
C2
This yields a new combination
of K and L to produce Q1.
Combination B is used in place
of combination A.
The new combination represents
the higher cost of labor relative
to capital and therefore capital
is substituted for labor.
K2
L2
B
C1
K1
L1
A
Q1
If the price of labor
changes, the isocost curve
becomes steeper due to
the change in the slope -(w/L).
Labor per year
Capital
per
year
51. Chapter 7 Slide
Cost in the Long Run
Isoquants and Isocosts and the
Production Function
K
L
MP
MP-MRTS =
∆
∆=
L
K
r
w
L
K −=
∆
∆=lineisocostofSlope
r
w
MP
MP
K
L ==and
52. Chapter 7 Slide
Cost in the Long Run
The minimum cost combination can
then be written as:
Minimum cost for a given output will
occur when each dollar of input added to
the production process will add an
equivalent amount of output.
rw
KL MPMP =
53. Chapter 7 Slide
Cost in the Long Run
Question
If w = $10, r = $2, and MPL = MPK,
which input would the producer use
more of? Why?
54. Chapter 7 Slide
The Effect of Effluent
Fees on Firms’ Input Choices
Firms that have a by-product to
production produce an effluent.
An effluent fee is a per-unit fee that
firms must pay for the effluent that
they emit.
How would a producer respond to an
effluent fee on production?
55. Chapter 7 Slide
The Scenario: Steel Producer
1) Located on a river: Low cost
transportation and emission
disposal (effluent).
2) EPA imposes a per unit effluent
fee to reduce the environmentally
harmful effluent.
The Effect of Effluent
Fees on Firms’ Input Choices
56. Chapter 7 Slide
The Scenario: Steel Producer
3) How should the firm respond?
The Effect of Effluent
Fees on Firms’ Input Choices
57. Chapter 7 Slide
The Cost-Minimizing
Response to an Effluent Fee
Waste Water
(gal./month)
Capital
(machine
hours per
month)
Output of 2,000
Tons of Steel per Month
A
10,000 18,000 20,0000 12,000
Slope of
isocost = -10/40
= -0.25
2,000
1,000
4,000
3,000
5,000
5,000
58. Chapter 7 Slide
The Cost-Minimizing
Response to an Effluent Fee
Output of 2,000
Tons of Steel per Month
2,000
1,000
4,000
3,000
5,000
10,000 18,000 20,0000 12,000
Capital
(machine
hours per
month)
E
5,000
3,500
Slope of
isocost = -20/40
= -0.50
B Following the imposition
of the effluent fee of $10/gallon
the slope of the isocost changes
which the higher cost of water to
capital so now combination B
is selected.A
Prior to regulation the
firm chooses to produce
an output using 10,000
gallons of water and 2,000
machine-hours of capital at A.
C
F
Waste Water
(gal./month)
59. Chapter 7 Slide
Observations:
The more easily factors can be
substituted, the more effective the fee is
in reducing the effluent.
The greater the degree of substitutes,
the less the firm will have to pay (for
example: $50,000 with combination B
instead of $100,000 with combination A)
The Effect of Effluent
Fees on Firms’ Input Choices
60. Chapter 7 Slide
Cost minimization with Varying
Output Levels
A firm’s expansion path shows the
minimum cost combinations of labor and
capital at each level of output.
Cost in the Long Run
61. Chapter 7 Slide
A Firm’s Expansion Path
Labor per year
Capital
per
year
Expansion Path
The expansion path illustrates
the least-cost combinations of
labor and capital that can be
used to produce each level of
output in the long-run.
25
50
75
100
150
10050 150 300200
A
$2000
Isocost Line
200 Unit
Isoquant
B
$3000 Isocost Line
300 Unit Isoquant
C
62. Chapter 7 Slide
A Firm’s Long-Run Total Cost Curve
Output, Units/yr
Cost
per
Year
Expansion Path
1000
100 300200
2000
3000
D
E
F
63. Chapter 7 Slide
Long-Run Versus
Short-Run Cost Curves
What happens to average costs when
both inputs are variable (long run)
versus only having one input that is
variable (short run)?
64. Chapter 7 Slide
Long-Run
Expansion Path
The long-run expansion
path is drawn as before..
The Inflexibility of
Short-Run Production
Labor per year
Capital
per
year
L2
Q2
K2
D
C
F
E
Q1
A
BL1
K1
L3
P
Short-Run
Expansion Path
65. Chapter 7 Slide
Long-Run Average Cost (LAC)
Constant Returns to Scale
If input is doubled, output will double
and average cost is constant at all
levels of output.
Long-Run Versus
Short-Run Cost Curves
66. Chapter 7 Slide
Long-Run Average Cost (LAC)
Increasing Returns to Scale
If input is doubled, output will more
than double and average cost
decreases at all levels of output.
Long-Run Versus
Short-Run Cost Curves
67. Chapter 7 Slide
Long-Run Average Cost (LAC)
Decreasing Returns to Scale
If input is doubled, the increase in
output is less than twice as large and
average cost increases with output.
Long-Run Versus
Short-Run Cost Curves
68. Chapter 7 Slide
Long-Run Average Cost (LAC)
In the long-run:
Firms experience increasing and
decreasing returns to scale and
therefore long-run average cost is “U”
shaped.
Long-Run Versus
Short-Run Cost Curves
69. Chapter 7 Slide
Long-Run Average Cost (LAC)
Long-run marginal cost leads long-run
average cost:
If LMC < LAC, LAC will fall
If LMC > LAC, LAC will rise
Therefore, LMC = LAC at the
minimum of LAC
Long-Run Versus
Short-Run Cost Curves
71. Chapter 7 Slide
Question
What is the relationship between long-
run average cost and long-run marginal
cost when long-run average cost is
constant?
Long-Run Versus
Short-Run Cost Curves
72. Chapter 7 Slide
Economies and Diseconomies of
Scale
Economies of Scale
Increase in output is greater than the
increase in inputs.
Diseconomies of Scale
Increase in output is less than the
increase in inputs.
Long-Run Versus
Short-Run Cost Curves
73. Chapter 7 Slide
Measuring Economies of Scale
outputin
increase1%afromcostin%Δ
elasticityoutputCostEc
=
−=
Long-Run Versus
Short-Run Cost Curves
74. Chapter 7 Slide
Measuring Economies of Scale
)//()/( QQCCEc ∆∆=
MC/AC)//()/( =∆∆= QCQCEc
Long-Run Versus
Short-Run Cost Curves
75. Chapter 7 Slide
Therefore, the following is true:
EC < 1: MC < AC
Average cost indicate decreasing economies
of scale
EC = 1: MC = AC
Average cost indicate constant economies of
scale
EC > 1: MC > AC
Average cost indicate increasing
diseconomies of scale
Long-Run Versus
Short-Run Cost Curves
76. Chapter 7 Slide
The Relationship Between Short-Run
and Long-Run Cost
We will use short and long-run cost to
determine the optimal plant size
Long-Run Versus
Short-Run Cost Curves
77. Chapter 7 Slide
Long-Run Cost with
Constant Returns to Scale
Output
Cost
($ per unit
of output
Q3
SAC3
SMC3
Q2
SAC2
SMC2
LAC =
LMC
With many plant sizes with SAC = $10
the LAC = LMC and is a straight line
Q1
SAC1
SMC1
78. Chapter 7 Slide
Observation
The optimal plant size will depend on the
anticipated output (e.g. Q1 choose SAC1,etc).
The long-run average cost curve is the
envelope of the firm’s short-run average cost
curves.
Question
What would happen to average cost if an output
level other than that shown is chosen?
Long-Run Cost with
Constant Returns to Scale
79. Chapter 7 Slide
Long-Run Cost with Economies
and Diseconomies of Scale
Output
Cost
($ per unit
of output
SMC1
SAC1
SAC2
SMC2
LMC
If the output is Q1 a manager
would chose the small plant
SAC1 and SAC $8.
Point B is on the LAC because
it is a least cost plant for a
given output.
$10
Q1
$8
B
A
LACSAC3
SMC3
80. Chapter 7 Slide
What is the firms’ long-run cost
curve?
Firms can change scale to change
output in the long-run.
The long-run cost curve is the dark blue
portion of the SAC curve which
represents the minimum cost for any
level of output.
Long-Run Cost with
Constant Returns to Scale
81. Chapter 7 Slide
Observations
The LAC does not include the minimum
points of small and large size plants?
Why not?
LMC is not the envelope of the short-run
marginal cost. Why not?
Long-Run Cost with
Constant Returns to Scale
82. Chapter 7 Slide
Production with Two
Outputs--Economies of Scope
Examples:
Chicken farm--poultry and eggs
Automobile company--cars and trucks
University--Teaching and research
83. Chapter 7 Slide
Economies of scope exist when the joint
output of a single firm is greater than the
output that could be achieved by two
different firms each producing a single
output.
What are the advantages of joint
production?
Consider an automobile company producing
cars and tractors
Production with Two
Outputs--Economies of Scope
84. Chapter 7 Slide
Advantages
1) Both use capital and labor.
2) The firms share management
resources.
3) Both use the same labor skills and
type of machinery.
Production with Two
Outputs--Economies of Scope
85. Chapter 7 Slide
Production:
Firms must choose how much of each to
produce.
The alternative quantities can be
illustrated using product transformation
curves.
Production with Two
Outputs--Economies of Scope
86. Chapter 7 Slide
Product Transformation Curve
Number of cars
Number
of tractors
O2 O1 illustrates a low level
of output. O2 illustrates
a higher level of output with
two times as much labor
and capital.O1
Each curve shows
combinations of output
with a given combination
of L & K.
87. Chapter 7 Slide
Observations
Product transformation curves are
negatively sloped
Constant returns exist in this example
Since the production transformation
curve is concave is joint production
desirable?
Production with Two
Outputs--Economies of Scope
88. Chapter 7 Slide
Observations
There is no direct relationship between
economies of scope and economies of
scale.
May experience economies of scope
and diseconomies of scale
May have economies of scale and not
have economies of scope
Production with Two
Outputs--Economies of Scope
89. Chapter 7 Slide
The degree of economies of scope
measures the savings in cost and can be
written:
C(Q1) is the cost of producing Q1
C(Q2) is the cost of producing Q2
C(Q1Q2) is the joint cost of producing both
products
)(
)()()C(
SC
2,1
2,121
QQC
QQCQCQ −+
=
Production with Two
Outputs--Economies of Scope
90. Chapter 7 Slide
Interpretation:
If SC > 0 -- Economies of scope
If SC < 0 -- Diseconomies of scope
Production with Two
Outputs--Economies of Scope
91. Chapter 7 Slide
Economies of Scope
in the Trucking Industry
Issues
Truckload versus less than truck load
Direct versus indirect routing
Length of haul
92. Chapter 7 Slide
Questions:
Economies of Scale
Are large-scale, direct hauls cheaper
and more profitable than individual
hauls by small trucks?
Are there cost advantages from
operating both direct and indirect
hauls?
Economies of Scope
in the Trucking Industry
93. Chapter 7 Slide
Empirical Findings
An analysis of 105 trucking firms
examined four distinct outputs.
Short hauls with partial loads
Intermediate hauls with partial loads
Long hauls with partial loads
Hauls with total loads
Economies of Scope
in the Trucking Industry
94. Chapter 7 Slide
Empirical Findings
Results
SC = 1.576 for reasonably large firm
SC = 0.104 for very large firms
Interpretation
Combining partial loads at an intermediate
location lowers cost management difficulties
with very large firms.
Economies of Scope
in the Trucking Industry
95. Chapter 7 Slide
Dynamic Changes in
Costs--The Learning Curve
The learning curve measures the
impact of worker’s experience on the
costs of production.
It describes the relationship between
a firm’s cumulative output and
amount of inputs needed to produce a
unit of output.
96. Chapter 7 Slide
The Learning Curve
Cumulative number of
machine lots produced
Hours of labor
per machine lot
10 20 30 40 500
2
4
6
8
10
97. Chapter 7 Slide
The Learning Curve
Hours of labor
per machine lot
10 20 30 40 500
2
4
6
8
10
The horizontal axis
measures the
cumulative number of
hours of machine
tools the firm has
produced
The vertical axis
measures the number
of hours of labor
needed to produce
each lot.
98. Chapter 7 Slide
The learning curve in the figure is based
on the relationship:
β−
= BNL
1and0betweenisandpositiveare
constantsareand
outputofunitperinputlabor
producedoutputofunitscumulative
β
β
B&A
BA,
L
N
=
=
Dynamic Changes in
Costs--The Learning Curve
99. Chapter 7 Slide
L equals A + B and this measures labor
input to produce the first unit of output
Labor input remains constant as the
cumulative level of output increases, so
there is no learning
:0=βIf
:1=NIf
Dynamic Changes in
Costs--The Learning Curve
100. Chapter 7 Slide
L approaches A, and A represent minimum
labor input/unit of output after all learning
has taken place.
The more important the learning effect.
:increasesand0 NIf >β
:largerThe β
Dynamic Changes in
Costs--The Learning Curve
101. Chapter 7 Slide
The Learning Curve
Cumulative number of
machine lots produced
Hours of labor
per machine lot
10 20 30 40 500
2
4
6
8
10
31.0=β
The chart shows a sharp drop
in lots to a cumulative amount of
20, then small savings at
higher levels.
Doubling cumulative output causes
a 20% reduction in the difference
between the input required and
minimum attainable input requirement.
102. Chapter 7 Slide
Observations
1) New firms may experience a learning
curve, not economies of scale.
2) Older firms have relatively small
gains from learning.
Dynamic Changes in
Costs--The Learning Curve
103. Chapter 7 Slide
Economies of
Scale Versus Learning
Output
Cost
($ per unit
of output)
AC1
B
Economies of Scale
A
AC2
Learning
C
104. Predicting the Labor
Requirements of Producing a Given Output
10 1.00 10.0
20 .80 18.0 (10.0 + 8.0)
30 .70 25.0 (18.0 + 7.0)
40 .64 31.4 (25.0 + 6.4)
50 .60 37.4 (31.4 + 6.0)
60 .56 43.0 (37.4 + 5.6)
70 .53 48.3 (43.0 + 5.3)
80 and over .51 53.4 (48.3 + 5.1)
Cumulative Output Per-Unit Labor Requirement Total Labor
(N) for each 10 units of Output (L) Requirement
105. Chapter 7 Slide
The learning curve implies:
1) The labor requirement falls per unit.
2) Costs will be high at first and then will
fall with learning.
3) After 8 years the labor requirement will be
0.51 and per unit cost will be half
what it was in the first year of production.
Dynamic Changes in
Costs--The Learning Curve
106. Chapter 7 Slide
Scenario
A new firm enters the chemical processing
industry.
Do they:
1) Produce a low level of output and sell at a
high price?
2) Produce a high level of output and sell at a
low price?
The Learning Curve in Practice
107. Chapter 7 Slide
The Learning Curve in Practice
How would the learning curve
influence your decision?
108. Chapter 7 Slide
The Empirical Findings
Study of 37 chemical products
Average cost fell 5.5% per year
For each doubling of plant size, average
production costs fall by 11%
For each doubling of cumulative output, the
average cost of production falls by 27%
Which is more important, the economies of
scale or learning effects?
The Learning Curve in Practice
109. Chapter 7 Slide
Other Empirical Findings
In the semi-conductor industry a study of
seven generations of DRAM
semiconductors from 1974-1992 found
learning rates averaged 20%.
In the aircraft industry the learning rates
are as high as 40%.
The Learning Curve in Practice
110. Chapter 7 Slide
Applying Learning Curves
1) To determine if it is profitable to
enter an industry.
2) To determine when profits will
occur based on plant size and
cumulative output.
The Learning Curve in Practice
111. Chapter 7 Slide
Estimating and Predicting Cost
Estimates of future costs can be
obtained from a cost function, which
relates the cost of production to the
level of output and other variables
that the firm can control.
Suppose we wanted to derive the
total cost curve for automobile
production.
112. Chapter 7 Slide
Total Cost Curve
for the Automobile Industry
Quantity of Cars
Variable
cost
General Motors
Toyota
Ford
Chrysler
Volvo
Honda
Nissan
113. Chapter 7 Slide
A linear cost function (does not show
the U-shaped characteristics) might
be:
The linear cost function is applicable
only if marginal cost is constant.
Marginal cost is represented by .
Qβ=VC
β
Estimating and Predicting Cost
114. Chapter 7 Slide
If we wish to allow for a U-shaped
average cost curve and a marginal
cost that is not constant, we might
use the quadratic cost function:
2
VC QQ γβ +=
Estimating and Predicting Cost
115. Chapter 7 Slide
If the marginal cost curve is not linear,
we might use a cubic cost function:
32
VC QQQ δγβ ++=
Estimating and Predicting Cost
116. Chapter 7 Slide
Cubic Cost Function
Output
(per time period)
Cost
($ per unit)
2
QQAVC δγβ ++=
2
QQM δγβ 32 ++=C
117. Chapter 7 Slide
Difficulties in Measuring Cost
1) Output data may represent an
aggregate of different type of products.
2) Cost data may not include opportunity
cost.
3) Allocating cost to a particular product
may be difficult when there is more than
one product line.
Estimating and Predicting Cost
118. Chapter 7 Slide
Cost Functions and the Measurement of
Scale Economies
Scale Economy Index (SCI)
EC = 1, SCI = 0: no economies or
diseconomies of scale
EC > 1, SCI is negative: diseconomies of
scale
EC < 1, SCI is positive: economies of scale
Estimating and Predicting Cost
119. Chapter 7 Slide
Cost Functions for Electric Power
Scale Economies in the Electric Power IndustryScale Economies in the Electric Power Industry
Output (million kwh) 43 338 1109 2226 5819
Value of SCI, 1955 .41 .26 .16 .10 .04
120. Chapter 7 Slide
Average Cost of Production
in the Electric Power Industry
Output (billions of kwh)
Average
Cost
(dollar/1000 kwh)
5.0
5.5
6.0
6.5
6 12 18 24 30 36
1955
1970
A
121. Chapter 7 Slide
Cost Functions for Electric Power
Findings
Decline in cost
Not due to economies of scale
Was caused by:
Lower input cost (coal & oil)
Improvements in technology
122. Chapter 7 Slide
A Cost Function for the
Savings and Loan Industry
The empirical estimation of a long-run
cost function can be useful in the
restructuring of the savings and loan
industry in the wake of the savings
and loan collapse in the 1980s.
123. Chapter 7 Slide
Data for 86 savings and loans for
1975 & 1976 in six western states
Q = total assets of each S&L
LAC = average operating expense
Q & TC are measured in hundreds of
millions of dollars
Average operating cost are measured as
a percentage of total assets.
A Cost Function for the
Savings and Loan Industry
124. Chapter 7 Slide
A quadratic long-run average cost function
was estimated for 1975:
Minimum long-run average cost reaches its
point of minimum average total cost when
total assets of the savings and loan reach
$574 million.
2
0.0536Q0.6153Q-2.38LAC +=
A Cost Function for the
Savings and Loan Industry
125. Chapter 7 Slide
Average operating expenses are
0.61% of total assets.
Almost all of the savings and loans in
the region being studied had
substantially less than $574 million in
assets.
A Cost Function for the
Savings and Loan Industry
126. Chapter 7 Slide
Questions
1) What are the implications of the
analysis for expansion and
mergers?
2) What are the limitations of using
these results?
A Cost Function for the
Savings and Loan Industry
127. Chapter 7 Slide
Summary
Managers, investors, and economists
must take into account the
opportunity cost associated with the
use of the firm’s resources.
Firms are faced with both fixed and
variable costs in the short-run.
128. Chapter 7 Slide
Summary
When there is a single variable input,
as in the short run, the presence of
diminishing returns determines the
shape of the cost curves.
In the long run, all inputs to the
production process are variable.
129. Chapter 7 Slide
Summary
The firm’s expansion path describes
how its cost-minimizing input choices
vary as the scale or output of its
operation increases.
The long-run average cost curve is
the envelope of the short-run average
cost curves.
130. Chapter 7 Slide
Summary
A firm enjoys economies of scale
when it can double its output at less
than twice the cost.
Economies of scope arise when the
firm can produce any combination of
the two outputs more cheaply than
could two independent firms that each
produced a single product.
131. Chapter 7 Slide
Summary
A firm’s average cost of production
can fall over time if the firm “learns”
how to produce more effectively.
Cost functions relate the cost of
production to the level of output of the
firm.