costs

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Presentation Transcript

Slide1: 

Costs of Production

The Meaning of Costs: 

The Meaning of Costs 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

Production in the Short run: 

Production in the Short run Production functions factors of production labour land and raw materials capital entrepreneurship the relationship between inputs and output TPP = ƒ(F1, F2, F3, … Fn)

Production in the Short run: 

Production in the Short run 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

Wheat production per year from a particular farm: 

Number of farm workers Wheat production per year from a particular farm Tonnes of wheat produced per year Number of workers 0 1 2 3 4 5 6 7 8 TPP 0 3 10 24 36 40 42 42 40

Wheat production per year from a particular farm: 

Number of farm workers Tonnes of wheat produced per year Number of workers 0 1 2 3 4 5 6 7 8 TPP 0 3 10 24 36 40 42 42 40 Wheat production per year from a particular farm

Wheat production per year from a particular farm: 

Wheat production per year from a particular farm Number of farm workers Tonnes of wheat produced per year TPP b d

Wheat production per year from a particular farm: 

Number of farm workers (L) Tonnes of wheat per year TPP Tonnes of wheat per year Number of farm workers (L) Wheat production per year from a particular farm

Wheat production per year from a particular farm: 

Tonnes of wheat per year TPP Tonnes of wheat per year MPP Number of farm workers (L) Number of farm workers (L) Wheat production per year from a particular farm

Wheat production per year from a particular farm: 

Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP Number of farm workers (L) Number of farm workers (L) Wheat production per year from a particular farm

Wheat production per year from a particular farm: 

Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP Number of farm workers (L) Number of farm workers (L) Wheat production per year from a particular farm

Wheat production per year from a particular farm: 

Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP b Number of farm workers (L) Number of farm workers (L) b Wheat production per year from a particular farm

Wheat production per year from a particular farm: 

Tonnes of wheat per year TPP Tonnes of wheat per year APP MPP b b d d Number of farm workers (L) Number of farm workers (L) Wheat production per year from a particular farm

Costs in the Short run: 

Costs in the Short run 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)

Total costs for firm X: 

Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 Total costs for firm X

Total costs for firm X: 

TFC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 Total costs for firm X

Total costs for firm X: 

TFC Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 TVC (£) 0 10 16 21 28 40 60 91

Total costs for firm X: 

TVC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 TVC (£) 0 10 16 21 28 40 60 91 TFC Total costs for firm X

Total costs for firm X: 

TVC TFC Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103

Total costs for firm X: 

TC Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103 TVC TFC Total costs for firm X

Total costs for firm X: 

TC TVC TFC Total costs for firm X

Costs in the Short run: 

Costs in the Short run Marginal cost marginal cost (MC) and the law of diminishing returns

Average and marginal costs: 

Output (Q) Costs (£) Average and marginal costs

Costs in the Short run: 

Costs in the Short run Marginal cost marginal cost (MC) and the law of diminishing returns the relationship between MC and TC curves

Average and marginal costs: 

Output (Q) Costs (£) Average and marginal costs

Costs in the Short run: 

Costs in the Short run Average cost average fixed cost (AFC) average variable cost (AVC) average (total) cost (AC) Relationship between average and marginal cost

Average and marginal costs: 

Output (Q) Costs (£) Average and marginal costs

Production in the Long run: 

Production in the Long run All factors variable in long run The scale of production: constant returns to scale increasing returns to scale

Slide29: 

Short-run and long-run increases in output

Slide30: 

Short-run and long-run increases in output

Slide31: 

Short-run and long-run increases in output

Slide32: 

Short-run and long-run increases in output

Production in the Long run: 

Production in the Long run All factors variable in long run The scale of production: constant returns to scale increasing returns to scale decreasing returns to scale

Production in the Long run: 

Production in the Long run 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

Production in the Long run: 

Production in the Long run 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

Production in the Long run: 

Production in the Long run 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

Production in the Long run: 

Production in the Long run 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

Costs in the Long run: 

Costs in the Long run Long-run average costs shape of the LRAC curve assumptions behind the curve

Alternative long-run average cost curves: 

Alternative long-run average cost curves Output O Costs Economies of Scale

Alternative long-run average cost curves: 

Output O Costs Alternative long-run average cost curves Diseconomies of Scale

Alternative long-run average cost curves: 

Output O Costs Alternative long-run average cost curves Constant costs

A typical long-run average cost curve: 

A typical long-run average cost curve Output O Costs

A typical long-run average cost curve: 

A typical long-run average cost curve Output O Costs Economies of scale Constant costs Diseconomies of scale

Costs in the Long run: 

Costs in the Long run Long-run average costs shape of the LRAC curve assumptions behind the curve Long-run marginal costs

Long-run average and marginal costs: 

Long-run average and marginal costs Output O Costs LRAC Economies of Scale

Long-run average and marginal costs: 

Output O Costs LRAC Long-run average and marginal costs Diseconomies of Scale

Long-run average and marginal costs: 

Output O Costs LRAC Long-run average and marginal costs = LRMC Constant costs

Long-run average and marginal costs: 

Output O Costs Long-run average and marginal costs LRAC Initial economies of scale, then diseconomies of scale

Costs in the Long run: 

Costs in the Long run 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

Costs in the Long run: 

Costs in the Long run 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

Deriving long-run average cost curves: factories of fixed size: 

Deriving long-run average cost curves: factories of fixed size Costs Output O 3 factories 2 factories 1 factory

Deriving long-run average cost curves: factories of fixed size: 

SRAC1 SRAC3 SRAC2 SRAC4 SRAC5 LRAC Costs Output O Deriving long-run average cost curves: factories of fixed size

Deriving a long-run average cost curve: choice of factory size: 

Deriving a long-run average cost curve: choice of factory size Costs Output O Examples of short-run average cost curves

Deriving a long-run average cost curve: choice of factory size: 

LRAC Costs Output O Deriving a long-run average cost curve: choice of factory size

Costs in the Long run: 

Costs in the Long run 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

Costs in the Long run: 

Costs in the Long run 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

Costs in the Long run: 

Costs in the Long run 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