Bài giảng Managerial Economics - Chapter 08: Production and Cost in the Short Run

Chapter 8: Production and Cost in the Short RunMcGraw-Hill/IrwinCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.Basic Concepts of Production TheoryProduction functionMaximum amount of output that can be produced from any specified set of inputs, given existing technologyTechnical efficiencyAchieved when maximum amount of output is produced with a given combination of inputsEconomic efficiencyAchieved when firm is producing a given output at the lowest possible total costInputs are considered variable or fixed depending on how readily their usage can be changedVariable inputAn input for which the level of usage may be changed quite readilyFixed inputAn input for which the level of usage cannot readily be changed and which must be paid even if no output is producedQuasi-fixed inputA “lumpy” or indivisible input for which a fixed amount must be used for any positive level of outputNone is purchased when output is zeroBasic Concepts of Production TheoryShort runAt least one input is fixedAll changes in output achieved by changing usage of variable inputsLong runAll inputs are variableOutput changed by varying usage of all inputsBasic Concepts of Production TheorySunk CostsSunk costPayment for an input that, once made, cannot be recovered should the firm no longer wish to employ that inputNot part of the economic cost of productionShould be ignored for decision making purposesAvoidable CostsAvoidable costsInput costs the firm can recover or avoid paying should it no longer wish to employ that inputMatter in decision making and should not be ignoredReflect the opportunity costs of resource useShort Run ProductionIn the short run, capital is fixedOnly changes in the variable labor input can change the level of outputShort run production functionQ = f (L, K) = f (L)Production Function8-8Average & Marginal ProductsAverage product of laborAP = Q/LMarginal product of laborMP = Q/LWhen AP is rising, MP is greater than APWhen AP is falling, MP is less than APWhen AP reaches it maximum, AP = MPLaw of diminishing marginal productAs usage of a variable input increases, a point is reached beyond which its marginal product decreasesTotal, Average, & Marginal Products of Labor, K = 2 (Table 8.2)Number of workers (L)Total product (Q)Average product (AP=Q/L)Marginal product (MP=Q/L)001522112317042205258628673048314931810314 --5551.6 525656.747.743.439.335.331.4 --5038 5260582818104-4Total, Average, & Marginal Products K = 2 (Figure 8.1)Panel APanel BTotal productAverage productMarginal productQ1L1L1L2Q2L2L0Q0L0Total, Average, & Marginal Product CurvesLaw of Diminishing Marginal Product (Returns)Only holds in the short-runAs the quantity of the variable input (labor) increases, the capital to labor ratio declinesEventually an incremental increase in the variable input adds less to output than the previous incremental increase in the variable input8-13Change in Capital Stock8-14Change in Capital Stock8-15Short Run Production CostsTotal variable cost (TVC)Total amount paid for variable inputsIncreases as output increasesTotal fixed cost (TFC)Total amount paid for fixed inputsDoes not vary with outputTotal cost (TC) TC = TVC + TFCShort-Run Total Cost Schedules (Table 8.4)Output (Q)Total fixed cost (TFC)Total variable cost (TVC)Total Cost (TC=TFC+TVC)0$6,000100 6,000200 6,000300 6,000400 6,000500 6,000600 6,000 $ 014,00022,000 4,0006,0009,00034,000$ 6,00020,00028,000 10,00012,00015,00040,000Total Cost Curves (Figure 8.3)Average Costs Average variable cost (AVC) Average fixed cost (AFC) Average total cost (ATC)Short Run Marginal CostShort run marginal cost (SMC) measures rate of change in total cost (TC) as output variesAverage & Marginal Cost Schedules (Table 8.5)Output (Q)Average fixed cost (AFC=TFC/Q)Average variable cost (AVC=TVC/Q)Average total cost (ATC=TC/Q= AFC+AVC)Short-run marginal cost (SMC=TC/Q)0100200300400500600 --1512 $60302010--3544 $40303056.7--5056 $100605066.7--5080 $402030120Average & Marginal Cost Curves (Figure 8.4)Short Run Average & Marginal Cost Curves (Figure 8.5)Short Run Cost Curve RelationsAFC decreases continuously as output increasesEqual to vertical distance between ATC & AVCAVC is U-shapedEquals SMC at AVC’s minimumATC is U-shapedEquals SMC at ATC’s minimumSMC is U-shapedIntersects AVC & ATC at their minimum pointsLies below AVC & ATC when AVC & ATC are fallingLies above AVC & ATC when AVC & ATC are risingShort Run Cost Curve RelationsRelations Between Short-Run Costs & ProductionIn the case of a single variable input, short-run costs are related to the production function by two relationsWhere w is the price of the variable inputMarginal Cost and Marginal ProductMarginal cost is inversely related to marginal productMarginal Cost and Marginal ProductW = $10MP = 10MC =$1MP = 5MC = $28-28Average Variable Cost and Average ProductAverage variable cost is inversely related to average productShort-Run Production and Total Cost8-30Short-Run Production and Marginal cost8-31Short-Run Production & Cost Relations (Figure 8.6)Relations Between Short-Run Costs & ProductionWhen marginal product (average product) is increasing, marginal cost (average cost) is decreasingWhen marginal product (average product) is decreasing, marginal cost (average variable cost) is increasingWhen marginal product = average product at maximum AP, marginal cost = average variable cost at minimum AVC