Upload
jewel-austin
View
231
Download
0
Tags:
Embed Size (px)
Citation preview
Chapter 8Production and Cost
Introduction to Economics (Combined Version) 5th Edition
Costs and ProfitsMicroeconomic theory
is based on the assumption that firms are in business to maximize profit.
• Profit is the difference between the revenue a firm earns by selling its output and the opportunity costs of producing that output.
Introduction to Economics (Combined Version) 5th Edition www.pdclipart.com
Explicit Costs Explicit costs are opportunity
costs that take the form of explicit payments to suppliers of factors of production and intermediate goods.
Examples: workers’ wages managers’ salaries salespeople’s commissions interest payments to banks and
other creditors fees for legal advice and other
services payments for energy and raw
material
Introduction to Economics (Combined Version) 5th Edition
Players’ salaries are an explicit cost for a professional football team.
Implicit Costs Implicit costs are opportunity
costs of using resources contributed by the firm’s owners (or owned by the firm itself as a legal entity) that are not obtained under contracts calling for explicit payments.
Examples: Labor of a small-business owner Opportunity cost of small-
business owners’ own savings invested in a business
Opportunity cost of capital invested by corporate shareholders
Introduction to Economics (Combined Version) 5th Edition
The opportunity cost of the time of a small-business owner who works without a salary is an example of an implicit cost.
Normal Profit Table shows the implicit and
explicit costs of the imaginary firm Fieldcom, Inc.
Total revenue minus explicit costs equals accounting profit.
Subtracting implicit costs from this quantity yields pure economic profit.
The opportunity cost of capital contributed by the owners can also be called normal profit.
Total Revenue $600,000Less explicit costs:
Wages and salaries 300,000Materials and other 100,000
_________Equals accounting profit $200,000Less implicit costs:
Owners’ forgone salary 160,000 80,000Opportunity cost
of capital 20,000_________
= pure economic profit $ 20,000
Introduction to Economics (Combined Version) 5th Edition
Fixed and Variable Costs• Variable costs: Costs of
inputs whose quantities can be changed easily in the short run
Fixed costs: Costs of inputs whose quantities can be changed only in the long run by increasing or decreasing the size of the firm’s plant
Sunk costs: One-time costs which, once made, cannot be recovered if the firm goes out of business
Introduction to Economics (Combined Version) 5th Edition www.pdclipart.com
The costs of owning a warehouse are a fixed cost for a trucking firm.
Marginal Physical Product Marginal physical product of labor is the amount by which total
output increases or decreases when the quantity of labor increases by one unit.
Introduction to Economics (Combined Version) 5th Edition
Law of Diminishing ReturnsAccording to the law of
diminishing returns, as the amount of one variable input is increased while the amounts of all other inputs remain fixed, a point will be reached beyond which the marginal physical product of the input will decrease.
Introduction to Economics (Combined Version) 5th Edition
Range of Diminishing
Returns
Marginal CostMarginal Cost is the amount by which total variable costs (labor
costs, in this example) increase or decrease when the quantity of output increases by one unit.
Introduction to Economics (Combined Version) 5th Edition
Family of Cost Curves
• TC = TVC + TFC• ATC = TC/Q• AVC = TVC/Q• AFC = TFC/Q• MC = ΔTC/ ΔQ
Introduction to Economics (Combined Version) 5th Edition
Marginal-Average Rule The marginal cost curve intersects the minimum points of the
average total cost and average variable cost curves.
Introduction to Economics (Combined Version) 5th Edition
Long- and Short-Run Average Cost Curves The position of the short-run average total cost curve for a firm depends on
the size of the plant. Each plant size can be represented by a U-shaped short-run average total cost curve. The firm’s long-run average cost curve is the “envelope” of these and other possible short-run average total cost curves; that is, it is a smooth curve drawn so that it just touches the short-run curves without intersecting any of them.
Introduction to Economics (Combined Version) 5th Edition
Economies and Diseconomies of Scale In any output range in which
long-run average cost decreases as output increases, the firm is said to experience economies of scale.
In any output range in which long-run average cost increases, the firm is said to experience diseconomies of scale.
If there is any range of output for which long-run average cost does not change as output varies, the firm is said to experience constant returns to scale in that range.
Introduction to Economics (Combined Version) 5th Edition
Appendix to Chapter Eight
Costs and Output with Two Variable Inputs
Introduction to Economics (Combined Version) 5th Edition
An Isoquant An isoquantity line, or isoquant
shows various ways of producing a given quantity of output.
Here, Points P, Q, and R represent various ways of growing the 200 bushels of corn.
A movement downward along the isoquant represents the substitution of fertilizer for land while output is maintained at 200 bushels per year.
As fertilizer is substituted for land, the isoquant becomes flatter because of diminishing returns.
Introduction to Economics (Combined Version) 5th Edition
Least-Cost Method of Production The price of fertilizer is assumed
to be $50 a ton and the rental price of land $50 per year.
A set of budget lines is drawn to represent various levels of spending on inputs. Line A ($400) does not provide
enough inputs to produce 200 bushels.
Line C ($625) provides enough inputs to grow 200 bushels of corn using methods P or R.
Line B ($500) permits the 200 bushels to be grown using method Q, which is the least-cost method given these input prices.
Introduction to Economics (Combined Version) 5th Edition
Effect of a Change in Input Price Assume the price of land increases from $50 to $200 and the price of fertilizer
remains fixed at $50 a ton. The $500 budget line shifts from position B to position C and now falls short of the 200-bushel isoquant. Increasing the amount spent on variable inputs to $1,000 shifts the budget line up to position D, where it just touches the isoquant at point R. Total variable cost of 200 bushels increases and fertilizer is be substituted for land, which is now relatively more costly.
Introduction to Economics (Combined Version) 5th Edition
From Isoquants to Cost Curve
Part (a) of this figure shows 100, 200, and 300 bushels isoquants.
Budget lines are based on input prices of $50 an acre for land and $50 a ton for fertilizer.
As output expands, the firm will move from T to Q and then to W along the expansion path.
Part (b) of the figure plots the amount of output and the total variable cost for each of these points, giving a total variable cost curve.
Introduction to Economics (Combined Version) 5th Edition