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BAEB602                      MICROECONOMICS                          CHAPTER 5                     COST PRODUCTIONPREPARED...
CHAPTER 5: COST PRODUCTIONThe Meaning of Costs                                                                 TOPIC   Op...
CHAPTER 5: COST PRODUCTIONProduction in the Short run                                                           TOPIC   P...
CHAPTER 5: COST PRODUCTIONProduction in the Short run                                                                    T...
CHAPTER 5: COST PRODUCTIONCosts in the Short run                                                          TOPIC   Costs a...
CHAPTER 5: COST PRODUCTIONCosts in the Short run                                                                      TOPI...
CHAPTER 5: COST PRODUCTIONCosts in the Short run                                                                      TOPI...
CHAPTER 5: COST PRODUCTIONCosts in the Short run                                                            TOPIC     Ave...
CHAPTER 5: COST PRODUCTIONProduction in the Long run                                                                    TO...
CHAPTER 5: COST PRODUCTIONProduction in the Long run                                                          TOPIC   Eco...
CHAPTER 5: COST PRODUCTIONProduction in the Long run                                                                    TO...
CHAPTER 5: COST PRODUCTIONProduction in the Long run                                                                      ...
CHAPTER 5: COST PRODUCTIONCosts in the Long run                                                TOPIC       Long-run avera...
CHAPTER 5: COST PRODUCTIONCosts in the Long run                                                  TOPIC       Long-run ave...
CHAPTER 5: COST PRODUCTIONCosts in the Long run                                                                          T...
CHAPTER 5: COST PRODUCTIONCosts in the Long run                                                                          T...
CHAPTER 5: COST PRODUCTIONCosts in the Long run                                                                           ...
CHAPTER 5: COST PRODUCTIONCosts in the Long run                                                                           ...
CHAPTER 5: COST PRODUCTIONCosts in the Long run                                                                           ...
CHAPTER 5: COST PRODUCTIONClass Activity                                                                       TOPIC   Be...
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BAEB602 Chapter 5: Cost Production

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BAEB602 Chapter 5: Cost Production

  1. 1. BAEB602 MICROECONOMICS CHAPTER 5 COST PRODUCTIONPREPARED BY:Nur Suhaili RamliSchool of Marketing andEntrepreneurship (SoME)FACULTY OF BUSINESS AND MANAGEMENT
  2. 2. CHAPTER 5: COST PRODUCTIONThe Meaning of Costs TOPIC  Opportunity costs  meaning of opportunity cost  examples  Measuring a firm’s opportunity costs  factors not owned by the firm: explicit costs  factors already owned by the firm: implicit costs  irrelevance of: historic costs replacement costs Slide 2 of 17
  3. 3. CHAPTER 5: COST PRODUCTIONProduction in the Short run TOPIC  Production functions  factors of production labour land and raw materials capital entrepreneurship  the relationship between inputs and output TPP = ƒ(F1, F2, F3, … Fn) Slide 3 of 17
  4. 4. CHAPTER 5: COST PRODUCTIONProduction in the Short run TOPIC  Long-run and short-run production  fixed and variable factors  distinction between short run and long run  The law of diminishing returns  The short-run production function:  total physical product (TPP)  average physical product (APP)  marginal physical product (MPP)  the graphical relationship between TPP, APP and MPP Slide 4 of 17
  5. 5. CHAPTER 5: COST PRODUCTIONCosts in the Short run TOPIC  Costs and inputs  costs and the productivity of factors  costs and the price of factors  Fixed costs and variable costs  Total costs  total fixed cost (TFC)  total variable cost (TVC) TVC and the law of diminishing returns  total cost (TC = TFC + TVC) Slide 5 of 17
  6. 6. CHAPTER 5: COST PRODUCTIONCosts in the Short run TOPIC  Marginal cost  marginal cost (MC) and the law of diminishing returns Slide 6 of 17
  7. 7. CHAPTER 5: COST PRODUCTIONCosts in the Short run TOPIC  Marginal cost  marginal cost (MC) and the law of diminishing returns  the relationship between MC and TC curves Slide 7 of 17
  8. 8. CHAPTER 5: COST PRODUCTIONCosts in the Short run TOPIC  Average cost  average fixed cost (AFC)  average variable cost (AVC)  average (total) cost (AC)  Relationship between average and marginal cost Slide 8 of 17
  9. 9. CHAPTER 5: COST PRODUCTIONProduction in the Long run TOPIC  All factors variable in long run  The scale of production:  constant returns to scale  increasing returns to scale  decreasing returns to scale  Returns to scale and economies and diseconomies of scale Slide 9 of 17
  10. 10. CHAPTER 5: COST PRODUCTIONProduction in the Long run TOPIC  Economies of scale  specialisation & division of labour  indivisibilities  container principle  greater efficiency of large machines  by-products  multi-stage production  organisational & administrative economies  financial economies  Economies of scope Slide 10 of 17
  11. 11. CHAPTER 5: COST PRODUCTIONProduction in the Long run TOPIC  Diseconomies of scale  managerial diseconomies  effects of workers and industrial relations  risks of interdependencies  External economies of scale  External diseconomies of scale  Location  balancing the distance from suppliers and consumers  importance of transport costs Slide 11 of 17
  12. 12. CHAPTER 5: COST PRODUCTIONProduction in the Long run TOPIC  Optimum combination of factors  MPPa/Pa = MPPb/Pb ... = MPPn/Pn  Decision making in different time periods  very short run  short run  long run  very long run  decisions can be made for all time periods at the same time Slide 12 of 17
  13. 13. CHAPTER 5: COST PRODUCTIONCosts in the Long run TOPIC  Long-run average costs  shape of the LRAC curve  assumptions behind the curve Slide 13 of 17
  14. 14. CHAPTER 5: COST PRODUCTIONCosts in the Long run TOPIC  Long-run average costs  shape of the LRAC curve  assumptions behind the curve  Long-run marginal costs Slide 14 of 17
  15. 15. CHAPTER 5: COST PRODUCTIONCosts in the Long run TOPIC  Long-run average costs  shape of the LRAC curve  assumptions behind the curve  Long-run marginal costs  Relationship between long-run and short-run average costs Slide 15 of 17
  16. 16. CHAPTER 5: COST PRODUCTIONCosts in the Long run TOPIC  Long-run average costs  shape of the LRAC curve  assumptions behind the curve  Long-run marginal costs  Relationship between long-run and short-run average costs  the envelope curve Slide 16 of 17
  17. 17. CHAPTER 5: COST PRODUCTIONCosts in the Long run TOPIC  Long-run average costs  shape of the LRAC curve  assumptions behind the curve  Long-run marginal costs  Relationship between long-run and short-run average costs  the envelope curve  Long-run cost curves in practice Slide 17 of 17
  18. 18. CHAPTER 5: COST PRODUCTIONCosts in the Long run TOPIC  Long-run average costs  shape of the LRAC curve  assumptions behind the curve  Long-run marginal costs  Relationship between long-run and short-run average costs  the envelope curve  Long-run cost curves in practice  the evidence Slide 18 of 17
  19. 19. CHAPTER 5: COST PRODUCTIONCosts in the Long run TOPIC  Long-run average costs  shape of the LRAC curve  assumptions behind the curve  Long-run marginal costs  Relationship between long-run and short-run average costs  the envelope curve  Long-run cost curves in practice  the evidence  minimum efficient plant size Slide 19 of 17
  20. 20. CHAPTER 5: COST PRODUCTIONClass Activity TOPIC  Before leaving the class, you should submit the following:  Identify the following  Short run  Long run  Total cost  Total average cost  Name, ID, classcode Slide 20 of 17

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