06 layton5e ppt edms

8/18/2019 06 Layton5e Ppt Edms

1/31


2/31


3/31

KEY POINTS

• Costs and profit

• Economic and accounting profit

• Short run and ong run• Constructing a production function

• !"fining short#run and ong#run production costs

• Cost of "n$ironm"nta% s"nsiti$" s"r$ic"s

• E&paining and id"ntif%ing sca"s of production


4/31

COSTS AN! PRO'IT

• Assumption( profit ma&imisation as th"

moti$ation for )usin"ss d"cisions*

• Profit ma&imisation goa has )""n sho+n

to )" a po+"rfu +a% of "&paining th"

)"ha$iour of manag"rs of firms +ho ar"

r"sponsi)" for ma,ing d"cisions a)outth" appropriat" "$" of output or pric"*


5/31

ECONO-IC AN! ACCO.NTIN/

PRO'IT• Accounting profit on% ta,"s into consid"ration

"&picit costs 0 pa%m"nts to non#o+n"rs of a

firm for th"ir r"sourc"s1 "*g* +ag"s1 "as"pa%m"nts1 cost of mat"rias1 "tc*

• Economic profit incud"s "&picit costs and

impicit costs +hich ar" th" opportunit% costs1

"*g* +h"r" o+n"rs ha$" forgon" a saar%

"s"+h"r" to start th" firm*


6/31

ACCO.NTIN/ PRO'IT 2ERS.S

ECONO-IC PRO'ITAccounting Proft is:

Total Revenue – Total Explicit

Costs

Economic Proft is: Total Revenue – Total

Opportunity Costs

Total Opportunity Cost is:Explicit Costs + Implicit Costs


7/31

ACCO.NTIN/ PRO'IT 2ERS.S

ECONO-IC PRO'IT E3A-P4E


8/31

NOR-A4 PRO'IT

• Th" minimum profit n"c"ssar% to ,""p a firm in

op"ration*

• A firm that "arns norma profit "arns totar"$"nu" "5ua to its tota opportunit% costs*

So it still makes an accountingproft


9/31

SHORT R.N 2ERS.S 4ON/ R.N

• Cost th"or% is th" r"ationship )"t+""n output

and costs*

• Economists distinguish )"t+""n th" short#runand th" ong#run*

• a period o time !ere t!ereis at least one fxed input

S!ort"

run• a su#cient period o time to

allo all inputs to $e varied%ong"run


10/31

&'

'I3E! AN! 2ARIA4E INP.TS

• any resource !ere t!e(uantity used cannotc!ange during a specifc

period o time

) fxed

input is*• any resource or !ic!

t!e (uantity used can

c!ange during a specifcperiod o time

)varia$leinput is*


11/31

&&

THE PRO!.CTION '.NCTION

• t!e maximum amounts ooutput a frm can produceand various (uantities o

inputs

T!erelations

!ip$eteen*

• s!os !o output rises$ased on num$er opeople employed

) typicalproductio

nunction*


12/31

THE SHORT#R.N PRO!.CTION

'.NCTION


13/31

THE SHORT#R.N PRO!.CTION

'.NCTION• E&hi)it 6*7 sho+s(

0 th" $aria)" input as th" num)"r of

"mpo%""s "mpo%"d p"r da%1 and "ach"mpo%"" is pr"sum"d to ha$" "5ua 8o)

s,is*

0 th" amount of and1 th" num)"r of $in"s1 th"

num)"r of machin"s and a oth"r inputs asfi&"d inputs*


14/31

-AR/INA4 PRO!.CT

• R"ca from Chapt"r 91 "conomists +or,

on th" margins(• +" m"asur" th" chang" in tota output produc"d )%

adding on" unit of a $aria)" input1 +ith a oth"r

inputs us"d )"ing h"d constant :r"inforcing ceteris

paribus;

• it is a short#run conc"pt*


15/31

-AR/INA4 PRO!.CT C.R2E

T!e la o diminis!ing returns explainst!e s!ape o t!e marginal product

curve


16/31

THE 4A< O' !I-INISHIN/

RET.RNS• "%ond som" point1 th" margina product

d"cr"as"s as additiona units of a

$aria)" factor ar" add"d to a fi&"dfactor*

• O$"ra producti$it% :output p"r +or,"r;

starts to fas aft"r a c"rtain num)"r ofadditiona inputs*


17/31

SHORT#R.N COST 'OR-.4AS

• In th" short run1 th" )usin"ss ma,"s

d"cisions )as"d upon th" cost of

producing $arious "$"s of output*

• Economists distinguish )"t+""n tota

costs and a$"rag" costs*


18/31

TOTA4 COST C.R2ES

TotalixedCosts

,o not varyas outputvaries andmust $e

paid even

i output is-ero

Total.aria$leCosts

)re -ero!en

output is-ero andvary as

outputvaries

TotalCost

Is t!e sumo total

fxed costand totalvaria$le

cost ateac! levelo output


19/31

SHORT#R.N COSTS C.R2ES(

TOTA4 COST C.R2ES


20/31

A2ERA/E COST C.R2ES

)veragefxed cost

)veragevaria$le

cost

)veragetotal cost


21/31

-AR/INA4 COST

• -argina ana%sis as,s ho+ much it costs

to produc" an additiona unit of output

• It is th" chang" in tota cost +h"n on"

additiona unit of output is produc"d


22/31

SHORT#R.N COSTS C.R2ES(

A2ERA/E AN! -AR/INA4 COSTS


23/31

-AR/INA4 COST RE4ATIONSHIPS(

THE -AR/INA40A2ERA/E R.4E

• AC alls/!en MC 0

AC

• AC rises/!en MC 1

AC

• AC is at its minimumpoint

/!en MC 2 AC


24/31

-C AN! -P IN2ERSE4Y RE4ATE!

• Rising portion of th" MP cur$" corr"sponds to th"

d"cining portion of th" MP cur$" and $ic" $"rsa*

• -a&imum point of th" MP cur$" corr"sponds to th"

minimum point of th" MC cur$"*


25/31

4ON/#R.N PRO!.CTION COSTS

• In th" ong run1 th" 5uantit% of a inputs

can )" ad8ust"d(

0 )uid a arg"r factor% 0 "&pand onto n"+ and

0 hir" n"+ staff*

• Th" ong#run ao+s gr"at"r panning forth" "&p"ct"d "$" of production*


26/31

4ON/#R.N A2ERA/E COST

C.R2ETh" cur$" trac"s

th" o+"st cost p"r

unit at +hich a firm

can produc" an%"$" of output +h"n

th" firm is in a

position to )uid an%

d"sir"d pant si="*


27/31

!I''ERENT SCA4ES O'

PRO!.CTION%R)C is 3"s!aped

Economieso scale%R)C curve

declines as t!efrm increases

output

Constantreturns to

scale%R)C curve is

!ori-ontal ast!e frmincreases

output

,iseconomies o scale

%R)C curverises as t!e frm

increases

output


28/31

!I''ERENT SCA4ES O'

PRO!.CTION


29/31

SCA4ES O' PRO!.CTION

Economies o scale

•

/!en %R)C declines as t!e frmincreases output4• /!en*

• t!e division o la$our and t!e use o

specialisation are increased• more e#cient use o capital e(uipment4


30/31


Constant returns to scale

• /!en %R)C does not c!ange as t!efrm increases output4


31/31


,iseconomies o scale

•

/!en t!e %R)C rises as t!e frmincreases output4• /!en t!ere*• is a $ureaucracy•

is an increased $arrier tocommunication• are management di#culties 5lack o

coordination64

06 layton5e ppt edms

Documents