Tài liệu Production and Cost Analysis I doc

9 - 26The Law of Diminishing Marginal Productivity The most important part of the production function is the part exhibiting diminishing marginal productivity and falling average produc

Analysis I

Chapter 9

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Introduction

In the supply process, people first offer the factors of production they control to the market

Then the factors are transformed by firms into goods that

consumers want.

Production occurs when factors of production (inputs) transform into goods and services.

The Role of the Firm

A firm is an economic institution that

transforms factors of production into

consumer goods and services

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The Role of the Firm

A firm:

Organizes factors of production.

Produces goods and services.

Sells produced goods to individuals,

businesses or government.

The Firm and the Market

A firm operates within the market and, simultaneously, it abandons the market

in the sense that it replaces the market with command and control

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The Firm and the Market

How an economy operates depends on

transaction costs—costs of

undertaking trades through the market

Firms Maximize Profit

Firm’s goal is to maximize profit

revenue and total cost

Profit = Total revenue – Total cost

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Firms Maximize Profit

An accountant will calculate profit by

subtracting explicit costs from the

revenue

For an economist,the measure of profit

Firms Maximize Profit

Implicit costs include the opportunity

costs of the factors of production

Economic profit = Revenue – (Implicit

costs +Explicit costs)

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The Production Process

The production process is generally

divided into a long run planning decision

and the short run adjustment decision.

The Long Run and the Short Run

which the firm can choose the least

expensive method of producing from

among all possible production

techniques

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The Long Run and the Short Run

the firm is constrained by past choices

in regard to what production decisions it can make

The Long Run and the Short Run

The terms long run and short run do not necessarily refer to specific periods of time

They refer to the degree of flexibility the firm has in changing the level of output

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The Long Run and the Short Run

In the long run:

By definition, the firm can vary the inputs as

much as it wants.

All inputs are variable.

The Long Run and the Short Run

In the short run:

Flexibility is limited.

Some factors of production cannot be changed.

Generally, the production facility (“the plant”) is fixed in the short run.

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Production Tables and

Production Functions

How a firm combines factors of

production to produce consumer goods can be presented in a production table

resulting from various combinations of factors of production or inputs

Production Tables and

Production Functions

Most of the production decisions firms make are short run decisions involving changes in output at a given production facility

The firm can increase or decrease

production by adjusting the amount of variable inputs, such as labour or

materials

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Production Tables and

Production Functions

the good or service produced by a

different number of workers

Production Tables and

Production Functions

output that will result from an additional worker, other inputs remaining constant

dividing total output by the number of

workers who produced it

relationship between the inputs (factors

of production) and outputs

Production Tables and

Production Functions

The production function discloses the

maximum amount of output that can be derived from a given number of inputs

Diminishing marginal productivity

4 6 7 6 5 3 1

— 4

10 17 23 28 31 0

Diminishing absolute productivity

Diminishing absolute productivity

AP

and c, p 203

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The Law of Diminishing

Marginal Productivity

The law of diminishing marginal

productivity is an important element in all real-world production processes

Both marginal and average

productivities initially increase, but

eventually they both decrease

The Law of Diminishing

Marginal Productivity

This means that initially the production function exhibits increasing marginal

productivity

Then it exhibits diminishing marginal productivity.

Eventually, the production function exhibits negative marginal productivity.

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The Law of Diminishing

Marginal Productivity

The most important part of the

production function is the part exhibiting diminishing marginal productivity and

falling average product

The Law of Diminishing

Marginal Productivity

more of a variable input is added to an existing fixed input, after some point the additional output obtained from the

additional input will fall

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The Law of Diminishing

Marginal Productivity

This law is also called the flowerpot

law, because it if did not hold true, the world’s entire food supply could be

grown in a single flower pot

The Costs of Production

Costs of production in the short run are:

Fixed Costs,

Variable Costs, and

Total Costs.

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Fixed Costs, Variable Costs, and Total Costs

and cannot be changed in the period of time under consideration

In the long run there are no fixed costs since all costs are variable

Fixed Costs, Variable Costs, and Total Costs

as output changes, such as the costs of labour and materials

The Costs of Production

Besides total costs, firms are concerned with their costs per unit of output

Per unit costs are

Average Total Cost,

Average Fixed Cost, and

Average Variable Cost

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Average Costs

average cost) equals total cost divided

by the quantity produced

ATC = TC/Q

Average Costs

divided by quantity produced

AFC = FC/Q

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Average Costs

cost divided by quantity produced

AVC = VC/Q

Average Costs

Since total cost is the sum of fixed and variable costs,

Average total cost is the sum of

average fixed cost and average variable cost

ATC = AFC + AVC

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Marginal Cost

in total cost from a change (increase) in output by one unit

MC = ∆ TC/ ∆ Q

The cost of producing

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Graphing Cost Curves

To gain a better understanding of the

costs concepts, we can illustrate them

Total Cost Curves

The total variable cost curve has the

same shape as the total cost curve—

increasing output increases variable

cost

O

TC = (VC + FC)

Average and Marginal Cost Curves

Marginal cost, average cost and

average variable cost curves are

U-shaped

The marginal cost curve will intersect

the average total cost curve and the

average variable cost curve at their

minimum points

the Average Fixed Cost

Curve

The average fixed cost curve looks like

a child’s slide – it starts out with a steep decline, then it becomes flatter and

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The U Shape of the Average and Marginal Cost Curves

In the short-run, output can only be

increased by increasing the variable

input

The U Shape of the Average and Marginal Cost Curves

As more and more variable input is

added to a fixed input, the law of

diminishing marginal productivity sets in

Marginal and average productivities fall and marginal costs rise

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The U Shape of the Average and Marginal Cost Curves

And when average productivity of the

variable input falls, average variable

costs rise

The U Shape of the Average and Marginal Cost Curves

The average total cost curve is the

vertical summation of the average fixed cost curve and the average variable

cost curve, so it is always higher than both of them

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The Relationship Between

Productivity and Costs

The shapes of the cost curves are

mirror-image reflections of the shapes

of the corresponding productivity

curves

The Relationship Between

Productivity and Costs

When one is increasing, the other is

decreasing

When one is at a maximum, the other is

at a minimum

MC

A

AP

The Relationship Between

Output per worker Costs per unit

Relationship Between

Marginal and Average Costs

The marginal cost and average cost

curves are related

When marginal cost exceeds average cost, average cost is rising.

When marginal cost is less than average

cost, average cost is falling.

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Relationship Between

Marginal and Average Costs

This relationship explains why marginal cost curves always intersect average

cost curves at the minimum of the

average cost curve

Relationship Between

Marginal and Average Costs

The position of the marginal cost

relative to average total cost tells us

whether average total cost is rising or falling

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Relationship Between

Marginal and Average Costs

To summarize:

If MC < ATC, then ATC is falling.

If MC = ATC, then ATC is at its low point.

If MC > ATC, then ATC is rising.

Relationship Between

Marginal and Average Costs

Marginal and average total cost reflect a general relationship that also holds for marginal cost and average variable

cost

If MC < AVC, then AVC is falling.

If MC = AVC, then AVC is at its low point.

If MC > AVC, then AVC is rising.

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Relationship Between

Marginal and Average Costs

Average total cost will fall when

marginal cost is above average variable cost, so long as average variable cost does not rise by more than average

fixed cost falls

Relationship Between Marginal

Costs per unit

$90

80 70 60 50 40 30 20 10 0

Area B

ATC AVC

Production and Cost

Analysis I