Managerial Economics

Production & Cost in the Short Run : 

Production & Cost in the Short Run By: Ashu Goyal Urvashi Khajuria Manish sajwan Tina Ramola Niharika Sarna Aman 8-1

Basic Concepts of Production Theory : 

Basic Concepts of Production Theory Production function Maximum amount of output that can be produced from any specified set of inputs, given existing technology Technical efficiency Achieved when maximum amount of output is produced with a given combination of inputs Economic efficiency Achieved when firm is producing a given output at the lowest possible total cost 8-2

Basic Concepts of Production Theory : 

Basic Concepts of Production Theory Inputs are considered variable or fixed depending on how readily their usage can be changed Variable input An input for which the level of usage may be changed quite readily Fixed input An input for which the level of usage cannot readily be changed and which must be paid even if no output is produced Quasi-fixed input An input employed in a fixed amount for any positive level of output that need not be paid if output is zero 8-3

Basic Concepts of Production Theory : 

Basic Concepts of Production Theory Short run At least one input is fixed All changes in output achieved by changing usage of variable inputs Long run All inputs are variable Output changed by varying usage of all inputs 8-4

Short Run Production : 

Short Run Production In the short run, capital is fixed Only changes in the variable labor input can change the level of output Short run production function 8-5

Average & Marginal Products : 

Average & Marginal Products Average product of labor AP = Q/L Marginal product of labor MP = Q/L When AP is rising, MP is greater than AP When AP is falling, MP is less than AP When AP reaches it maximum, AP = MP Law of diminishing marginal product As usage of a variable input increases, a point is reached beyond which its marginal product decreases 8-6

Total, Average, & Marginal Products of Labor, K = 2 : 

Total, Average, & Marginal Products of Labor, K = 2 8-7 -- 55 51.6 52 56 56.7 47.7 43.4 39.3 35.3 31.4 -- 50 38 52 60 58 28 18 10 4 -4

Total, Average & Marginal Products, K = 2 : 

Total, Average & Marginal Products, K = 2 8-8

Total, Average & Marginal Product Curves : 

Total, Average & Marginal Product Curves 8-9 Panel A Panel B

Short Run Production Costs : 

Short Run Production Costs Total variable cost (TVC) Total amount paid for variable inputs Increases as output increases Total fixed cost (TFC) Total amount paid for fixed inputs Does not vary with output Total cost (TC) TC = TVC + TFC 8-10

Short-Run Total Cost Schedules : 

Short-Run Total Cost Schedules 8-11 $ 0 14,000 22,000 4,000 6,000 9,000 34,000 $ 6,000 20,000 28,000 10,000 12,000 15,000 40,000

Total Cost Curves : 

Total Cost Curves 8-12

Average Costs : 

Average Costs 8-13

Short Run Marginal Cost : 

Short Run Marginal Cost Short run marginal cost (SMC) measures rate of change in total cost (TC) as output varies 8-14

Average & Marginal Cost Schedules : 

Average & Marginal Cost Schedules 8-15 -- 15 12 $60 30 20 10 -- 35 44 $40 30 30 56.7 -- 50 56 $100 60 50 66.7 -- 50 80 $40 20 30 120

Average & Marginal Cost Curves : 

Average & Marginal Cost Curves 8-16

Short Run Average & Marginal Cost Curves : 

Short Run Average & Marginal Cost Curves 8-17

Short Run Cost Curve Relations : 

Short Run Cost Curve Relations AFC decreases continuously as output increases Equal to vertical distance between ATC & AVC AVC is U-shaped Equals SMC at AVC’s minimum ATC is U-shaped Equals SMC at ATC’s minimum 8-18

Short Run Cost Curve Relations : 

Short Run Cost Curve Relations SMC is U-shaped Intersects AVC & ATC at their minimum points Lies below AVC & ATC when AVC & ATC are falling Lies above AVC & ATC when AVC & ATC are rising 8-19

Relations Between Short-Run Costs & Production : 

Relations Between Short-Run Costs & Production In the case of a single variable input, short-run costs are related to the production function by two relations 8-20

Short-Run Production & Cost Relations : 

Short-Run Production & Cost Relations 8-21

Relations Between Short-Run Costs & Production : 

Relations Between Short-Run Costs & Production When marginal product (average product) is increasing, marginal cost (average cost) is decreasing When marginal product (average product) is decreasing, marginal cost (average variable cost) is increasing When marginal product = average product at maximum AP, marginal cost = average variable cost at minimum AVC 8-22

Thank you… : 

Thank you… 8-23