Bài giảng Understanding Economics - Chapter 4 Costs of Production

Understanding Economics2nd edition by Mark Lovewell and Khoa NguyenChapter 4Costs of ProductionCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Chapter FocusIn this chapter you will:consider the major organizational forms of business—sole proprietorships, partnerships, and corporationslearn about economic costs (explicit and implicit) of production and economic profitanalyze short-run (total, average, and marginal) products, and the law of diminishing marginal returnsderive short-run (total, average, and marginal) costsexamine long-run results of production (increasing returns to scale, constant to scale, and decreasing to scale) and long-run costsCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Types of ProductionThere are three main sectors in the economythe primary sector consists of industries that extract or cultivate natural resourcesthe secondary sector consists of industries that fabricate or process goodsthe service sector consists of trade and information industriesCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Productive EfficiencyBusinesses choose from different production processesa labour-intensive process employs more labour and less capitala capital-intensive process employs more capital and less labourThe lowest-cost process provides productive efficiencyCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Economic CostsEconomic costs includeexplicit costs which are payments to resource supplies outside a businessimplicit costs which are what owners give up by being involved in a businessEconomic profit is found by subtracting economic costs (both explicit and implicit) from total revenueCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Production in the Short Run (a)In the short runsome inputs (such as capital) are fixedother inputs (such as labour) are variableInputs are combined to make a business’s total productaverage product is total product divided by the number of workersmarginal product is the extra total product with an additional workerCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.The Law of Diminishing Marginal ReturnsShort-run production is determined by the law of diminishing marginal returnsthe addition of more variable input causes marginal product to fall after some pointaverage product also falls after some pointCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Relating Average and Marginal ValuesAverage and marginal values are related using three rulesif an average value rises then the marginal value must be above the average valueif an average value falls then the marginal value must be below the average valueif an average value stays constant then the marginal value must equal the average value0123456Number of Workers Employed per DayT-Shirts Produced per Day50100150200250300Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Total, Marginal, and Average ProductsFigure 4.4, Page 970123456Number of Workers Employed per DayT-Shirts Produced per Day406080100120-2020Labour(L)(workersper day)Total Product(q)(T-shirtsper day)MarginalProduct(Δq/ΔL)(T-shirtsper day)Average Product(q/L)(T-shirts per day)0123456080200250270280270--8010083.367.5564580120502010-10TPMPAPDiminishingreturns set inCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Costs in the Short RunShort-run costs includefixed costs (costs of all fixed inputs)variable costs (costs of all variable inputs)total cost (fixed costs + variable costs)Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Marginal Cost (a)Marginal cost is the extra cost of producing an extra unit of outputit equals the change in total cost divided by the change in total productThe marginal cost curve is shaped like a “J” because of the law of diminishing marginal returnsCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Marginal Cost (b)Figure 4.7, Page 100050100150200250300Quantity of T-Shirts Produced Per Day$ per T-Shirt24681012MCDiminishingreturns set inCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Per-Unit CostsPer-unit costs includeaverage fixed cost (fixed costs divided by total product)average variable cost (variable costs divided by total product)average costeither total cost divided by total productor average fixed cost + average variable costShort-Run Costs for Pure ‘n’ Simple T-Shirts Figure 4.6, Page 99Labour(L)TotalProduct(q)FixedCosts(FC)VariableCosts(VC)TotalCost(TC)(FC + VC)MarginalCost(MC)(ΔTC/Δq)AverageFixed Costs(AFV)(FC/q)AverageVariableCosts(AVC)(VC/q)AverageCost(AC)(AFC + AVC)012345080200250270280825825825825825825014030042553564082596511251250136014651.751.332.505.5010501401601251101058012050201010.314.133.303.062.951.751.501.701.982.2912.065.635.005.045.24Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.The Family of Short-Run Cost CurvesFigure 4.8, page 102050100150200250300Quantity of T-Shirts Produced Per Day$ per T-Shirt24681012AVCAFCMCACbaCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Returns to Scale (a)All inputs can be changed by the same proportion in the long runincreasing returns to scale means the % change in output > the % change in inputsconstant returns to scale means the % change in output = the % change in inputsdecreasing returns to scale means the % change in output < the % change in inputsCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Returns to Scale (b)Increasing returns to scale are caused by the division of labour or specialized capital or specialized managementConstant returns to scale arise whenever making more of a product means repeating exactly the same tasksDecreasing returns to scale are caused by management difficulties or limited natural resourcesCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Costs in the Long Run (a)Long-run average cost is the minimum short-run average cost at every outputThe long-run average cost curve is saucer-shaped because of various ranges of returns to scaleinitial range of increasing returns to scalemiddle range of constant returns to scalefinal range of decreasing returns to scaleQuantity of Magazines per Week$ per MagazineRange ARange BRange CLong-Run Average CostsCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Costs in the Long Run (b)Figure 4.9, page 105AC1AC2AC3AC4Long-Run ACCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Costs in the Long Run (b)Figure 4.9, page 97Possible Long-Run Average CostsQuantity of Output$ per UnitExtended Range ofIncrease Returnsto ScaleQuantity of Output$ per UnitExtended Range ofConstant Returnsto ScaleQuantity of Output$ per UnitExtended Range ofIncrease Returnsto ScaleCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Critic of the Modern CorporationJohn Kenneth Galbraithsuggests that ownership and control are separated in large corporationsargues that shareholders (the owners) give up control to managersholds out the possibility that managers are more interested in maximizing sales than in maximizing profitMeasuring Business Performance (a)Economists and accountants differ in the way they measure business performance. For accountants, there are two main business records: a balance sheet shows a business’s assets, or items that it owns. It also lists a business’s liabilities, or items that it owes, as well as owner’s equity, which is the owner’s stake in the business Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Income Statement for Jumbo HotdogsFigure A, Page 113Total SalesExpensesFoodFuelDepreciationInterest on loanTotal explicit costsTotal profit$50 000$ 15 0003 5001 000500$20 000$ 30 000Income Statement(for the year 2001)Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Measuring Business Performance (b)An income statement shows a business’s activities in a given time period, with total sales (or revenue) and total expenses, which are its explicit costs.One important explicit cost is depreciation, or the reduction in the value of a business’s durable assets.For these assets (excluding land), an annual depreciation charge is included in the income statement as an expense.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Calculation of Economic Profitfor Jumbo Hotdogs Figure B, Page 114Total RevenueExplicit CostsFoodFuelDepreciationInterest on loanTotal explicit costsImplicit CostsOwner’s wageNormal profitTotal implicit costsEconomic Profit$50 000$ 15 0003 5001 000500$20 000$28 000$ 2 000$ 25 0003 000Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Accounting versus Economic ProfitAccounting profit is total revenue minus explicit costsBecause accountants only consider explicit costs, accounting profit always exceeds economic profit by the amount of the business’s implicit costs.Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.Understanding Economics2nd editionby Mark LovewellChapter 4The EndCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.