700 likes | 1.1k Vues
The Costs of Production. Chapter 6. In This Chapter…. 6.1. The Production Process 6.2. How Much to Produce? 6.3. The Right Size: Large or Small? . 6.1. The Production Process. 6.1. The Production Process. Factors of Production (Inputs). Final Goods and Services (Output ).
E N D
The Costs of Production Chapter 6
In This Chapter… 6.1. The Production Process 6.2. How Much to Produce? 6.3. The Right Size: Large or Small?
6.1. The Production Process Factors of Production (Inputs) Final Goods and Services (Output) Production Process
6.1.The Production Process • Factors of production – • Resource inputs used to produce goods and services. • land, labor, capital, entrepreneurship. • It takes some or all factors of production to produce a good or service – no matter what the good; OUTPUT
6.1. The Production Process • Production function : • is the technical relationship that expresses the maximum quantity of a good that can be produced (attainable) from different combinations of factors (inputs). • The technical relationship between the quantities of inputs used in the production process and the maximum output that can be produced.
6.1. The Production Process • The purpose of a production function is to tell us how much output we can produce with varying amounts of factor inputs • Varying Input Levels • During some time period the amount of some inputs that can be employed are fixed or can’t be varied….Fixed Inputs (E.g. Land; Plant Size) • While the amount of some other inputs can be easily changed… Variable Input (E.g., Labor)
6.1. The Production Process Short-Run …. • The time period during which the quantity (and quality) of some inputs cannot be changed. • When there are fixed inputs, we’re dealing with a short run production condition.
6.1. The Production Process • In the Long Run, however, all inputs can be varied • Thus long run is a time period that allows us to sufficiently vary the amount of inputs we can use in the production process. • When we vary the amounts of input we use in the production process it affects productivity
6.1. The Production Process • Productivity - Output per unit of input, for example, output per labor hour. • The productivity of any factor of production depends on the amount of other resources available to it.
55 G H F E I 50 D 45 40 35 C 30 Jeans Output (pairs per day) 25 20 B 15 10 5 0 A 1 2 3 4 5 6 7 8 Labor Input (machine operators per day) The Production Function Total output Amount of Output depends on Input levels
Marginal Productivity An important Concept
Marginal Productivity • Marginal physical product(MPP): • is the change in total output that results from employment of one additional unit of the variable input.
G H F E I D C B c d b e g f h A a i Marginal Physical Product Total output 55 50 45 40 + 10 jeans 35 30 Third worker Jeans Output (pairs per day) 25 20 15 MPP 10 5 0 3 4 5 1 2 6 7 8 Labor Input (machine operators per day)
MPP:…Important Feature… • When the MPP of labor (MPPL >0), then total output increases. • Improving the ratio of the variable input (labor) to other factors increases the MPP of the variable input (labor). • But there is a limit to which we can do this because the capacity of the fixed resources will be exhausted • This leads to eventual decline in the additional and total output we could produce
Diminishing Marginal Returns • I.e., as more labor is hired, each unit of labor will have less capital and land to work with. • Thus output begins to rise more and more slowly as more workers are hired and will eventually fall
Law of Diminishing Returns • According to thelaw of diminishing returns, the marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs. • All types of production are subject to this natural law
G H F E I D C B c d b e g f h A a i Diminishing Marginal Returns Total output 55 50 45 40 + 10 jeans 35 30 Third worker Jeans Output (pairs per day) 25 20 15 MPP 10 5 0 3 4 5 1 2 6 7 8 Labor Input (machine operators per day)
Resource Costs 6.2. The Costs of Production (The components of the Costs of Production)
Resource Costs • A production function tells us how much a firm can produce but not how much it should produce. • Goal of a firm: Maximizing profit • Profit: The difference between Total Revenue (PxQ) and Total Cost (TC) • Requires every firm to decide on its most desirable level of output
Explicit vs. Implicit Cost • Explicit costs: • are the payments made for the use of a resource. • Implicit costs : • are the value of resources used, even when no direct payment is made.
Economic vs. Accounting Profit Accounting Profit • Accountants typically count dollar costs only and ignore any resource use that doesn’t result in an explicit dollar cost. Economic Profit: • Economists consider implicit costs as well as explicit costs to be part of the total costs of production.
Economic vs. Accounting profit • I.e., Economic cost represents he value of all resources used to produce a good or service; opportunity cost.
Dollar Costs (Economic Costs) • The dollar costs of production are directly related to the underlying production function. 1. Total Fixed Costs (TFC) 2. Total Variable Costs (TVC) 3. Total Costs (TC)
$1,200 1,100 1,000 900 800 700 600 Production Costs (dollars per day) 500 400 300 200 100 0 15 30 45 60 75 Rate of Output (pairs of jeans per day) Fixed Cost • Fixed costs are the costs of production that do not change when the rate of output is altered, such as the cost of basic plant and equipment. TFC=$120
$1,200 1,100 1,000 900 800 700 600 Production Costs (dollars per day) 500 400 300 200 100 0 15 30 45 60 75 Rate of Output (pairs of jeans per day) Variable Cost • Variable costs are the costs of production that change when the rate of output is altered, such as labor and material costs. TVC
$1,200 1,100 1,000 900 800 700 G 600 Production Costs (dollars per day) 500 400 B 300 A 200 100 0 15 30 45 60 75 Rate of Output (pairs of jeans per day) Total Cost • Total cost is the market value of all the resources used to produce a good or service. Total cost Variable costs Fixed costs
Total Cost • How fast total costs rise depends on variable costs only. • Total cost is equal to the fixed costs when output is zero. • There is no way to avoid fixed costs in the short run.
$1,200 1,100 1,000 900 800 700 G 600 Production Costs (dollars per day) 500 400 B 300 A 200 100 0 15 30 45 60 75 Rate of Output (pairs of jeans per day) The Cost of Jeans Production Total cost include variable and fixed costs Total cost Variable costs Variable costs Fixed costs
Average Costs • One of the most common cost is average, or per-unit, cost. 4. Average Fixed Cost (AFC) 5. Average Variable Cost (AVC) 6. Average Total Cost (ATC)
Average Costs • Average fixed cost(AFC) is total fixed cost divided by the quantity produced in a given time period.
Average Costs • Average variable cost(AVC) is total variable cost divided by the quantity produced in a given time period.
Average Costs • Average total cost(ATC) is total cost divided by the quantity produced in a given time period.
Average Costs • Average total cost is the sum of average fixed and average variable cost. ATC = AFC + AVC
$24 I 20 ATC J 16 O K N L M Costs (dollars per pair) 12 8 AVC 4 AFC 0 10 20 30 40 50 Rate of Output (pairs per day) Average Costs
Characteristic of Average Costs • Falling AFC • As the rate of output increases, AFC decreases as the fixed cost is spread over more output. • Any increase in output lowers average fixed cost.
Characteristic of Average Costs • Falling and then Rising AVC • AVC will eventually rise as the rate of output increases. • AVC rises because of diminishing returns in the production process.
Characteristic of Average Costs • U-Shaped ATC • The initial dominance of falling AFC, combined with the later resurgence of rising AVC, is what gives the ATC curve its characteristic U shape.
Minimum Point of the Average Total Cost • The bottom of the U-shaped average total cost curve represents the minimum average total costs. • It identifies the lowest possible opportunity costs to produce the product. • Note: Profit aren’t necessarily maximized where average total costs are minimized.
Marginal Cost • Marginal cost refers to the change in total costs associated with one more unit of output.
v u t s q r p Marginal Cost $35 30 Higher output level becomes increasingly expensive 25 20 15 10 5 10 20 30 40 50 Rate of Output (pairs per day)
Relationship between MPP and MC • Whenever MPP is increasing, the marginal cost of producing a good must be falling. • If marginal physical product declines, marginal cost increases. • Diminishing returns in production cause marginal costs to increase as the rate of output is expanded.
24 1.20 c 1/g 1.00 20 16 0.80 b Diminishing marginal physical product Rising marginal cost 12 0.60 Marginal Physical Product Additional Labor Cost d 1/f 8 0.40 1/e e 4 0.20 1/d f 1/b 1/c g h 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 i Labor Input Labor Input Falling MPP Implies Rising Marginal Cost Diminishing marginal productivity implies . . . Rising marginal cost
Summarizing the Relationship between different types of Costs of Production and their Implication