chapter 6 supply: cost side of market recall: tp curve - total product
TRANSCRIPT
Chapter 6
Supply:Cost Side of Market
Recall: TP Curve - Total Product
Slope of TP curve: MP - Marginal Product
The marginal product of an input is the additional quantity of output that is produced by using one more unit of that input.
Marginal Product of Labor Curve
Key Points of TP
TP first increases then max out and starts to decrease
TP increases at a slower pace TP is maximized when MP=0 MP is decreasing but positive when TP i
s increasing MP is decreasing and negative when T
P is decreasing MP = 0 when TP is maximized
Diminishing Returns to an Input (diminishing marginal product)
diminishing returns to an input: an increase in the quantity of an input leads to a decline in the marginal product of that input, holding the levels of all other inputs fixed
Other things held constant, as more of a variable input is used in production, its marginal productivity will decline after a certain point.
Total Product, Marginal Product, and the Fixed Input
Short-Run Production:some inputs are fixed
Total Product: Q = f (L, K, N, E) Total Product of Labor:
Q = f (L) (K, N, E fixed) Marginal Product of Labor:
MPL= dQ / dL
Average Product of labor: APL=Q/L
Short-Run Production:Q, AP, MP, and shift in Q
L \ K 1 2 3 4 5 1 25 52 74 90 100 2 55 112 162 198 224
3 83 170 247 303 342
4 108 220 325 400 453
5 125 258 390 478 543
6 137 286 425 523 598
K=1
L TP=Q MP AP
1 25 25 25
2 55 30 22.5
3 83 28 27.7
4 108 25 27
5 125 17 25
6 137 12 22.8
Homework 3
Use a table to show TP, MP, AP of labor when K=2
Use tables to show TP, MP, AP of capital when L=1, L=2, respectively
Draw the TP curves of labor when K=1, K=2, respectively
Draw the TP curves of capital when L=1, L=2, respectively
Bonus: what can you conclude from the tables and graphs?
Production: one input
TP = Q = f(L,K,N,E) When K,N,E fixed: SR TP(L) = f (L) AP(L) = TP(L) / L MP(L) = dTP(L) /dL MP is the slope of TP TP maximized when MP = 0
Short-Run Production (one input) Summary
L=0 leads to Q=0 when MP is increasing, Q is increasing
at an increasing rate when MP is decreasing, Q may still
increase but at a decreasing rate When MP=0, Q stop increasing and
start decreasing (Q is maximized). AP reaches its maximum when AP=MP
Q
L0
TP
AP
MP
E
A B
Ⅰ Ⅱ Ⅲ
FMP>APAP
MP<APAP
MP<0TP
MP=AP
AP Max
MP=0
TP Max
Questions to Consider
Why will MP decline before AP declines? Why will AP decline before TP declines? Why will MP intersect AP at AP’s maxim
um?
From Production to Cost
Production: transferring inputs into outputs Inputs: resources, production factors, - L, K, N, E Variable inputs:
– level of usage change with level of production– An input whose quantity can be altered in the short run
Fixed inputs: – level of usage does not change with level of production (in th
e Short-Run)– An input whose quantity cannot be altered in the short run
Long-run: all inputs are variable (no fixed inputs)
Costs: expenses on inputs
The total cost of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output.
TC=TFC + TVC
SR Costs: TFC and TVC
TFC: – total amount paid for fixed inputs. – The sum of all payments made to a firm’s fixed inp
uts– not vary with output in the SR
TVC: – total amount paid to variable inputs– The sum of all payments made to the firms variabl
e inputs – increases when output increases
SR Costs: Marginal Cost
The cost of producing one additional unit of output
MC=dTC/dQIn SR, dTC = dTVC, therefore S
MC = dTVC/dQ
Increasing Marginal Cost
Increasing Marginal Cost: as more of a product is produced, the additional cost of producing one more unit of output is increasing.
Fixed, Variable, and Total Costs
0 0 40 0 40
1 80 40 12 52
2 200 40 24 64
3 260 40 36 76
4 300 40 48 88
5 330 40 60 100
6 350 40 72 112
7 362 40 84 124
Employeesper day
Bottlesper day
Fixed cost($/day)
Variable cost($/day)
Total cost($/day)
Marginal cost($/bottle)
0.15
0.10
0.20
0.30
0.40
0.60
1.00
Table 6.2, P.173
Total Cost Curve
The total cost curve shows the relationship between production level (quantity of output produced) and the total cost of the production.
It becomes steeper as more output is produced due to diminishing returns to inputs, or due to increasing marginal cost.
Total Cost Curve for George and Martha’s Farm
Total Cost and Marginal Cost Curves for Ben’s Boots
Average Cost
Average total cost, often referred to simply as average cost, is total cost divided by quantity of output produced.
Average fixed cost is the fixed cost per unit of output (total fixed cost divided by quantity of output produced).
Average variable cost is the variable cost per unit of output (total variable cost divided by quantity of output produced).
SR Costs: Average Costs
Average Fixed Cost:
AFC=TFC/Q Average Variable Cost:
AVC=TVC/Q Average Total Cost: ATC=TC/Q=(TFC+
TVC)/Q
=TFC/Q+TVC/Q=AFC+AVC
Example:Total Costs and Average Costs
Q TFC TVC TC AFC AVC ATC 0 6000 0 6000 ----- ----- ----- 100 6000 4000 10000 60 40 100 200 6000 6000 12000 30 30 60 300 6000 9000 15000 20 30 50 400 6000 14000 20000 15 35 50 500 6000 22000 28000 12 44 56 600 6000 34000 40000 10 56.7 66.7
Total Costs and Marginal Cost
Q TFC TVC TC dTC dQ MC 0 6000 0 6000 ----- ----- ----- 100 6000 4000 10000 4000 100 40 200 6000 6000 12000 2000 100 20 300 6000 9000 15000 3000 100 30 400 6000 14000 20000 5000 100 50 500 6000 22000 28000 8000 100 80 600 6000 34000 40000 12000 100 120
Q, TC, TVC, ATC, AVA, MC
Q TFC TVC TC ATC AVC MC
0 6000 0 6000 ----- ----- -----
100 6000 4000 10000
100 40 40
200 6000 6000 12000
60 30 20
300 6000 9000 15000
50 30 30
400 6000 14000
20000
50 35 50
500 6000 22000
28000
56 44 80
600 6000 34000
40000
66.7 56.7 120
Q TFC TVC TC ATC AVC MC
0 6000 0 6000 ----- ----- -----
100 6000 4000 10000 100 40 40
200 6000 6000 12000 60 30 20
300 6000 9000 15000 50 30 30
400 6000 14000 20000 50 35 50
500 6000 22000 28000 56 44 80
600 6000 34000 40000 66.7 56.7 120
Q, TC, TVC, ATC, AVA, MC
Homework 4
Based on the info given in the previous slide, draw the following curves:– ATC– AVC– AFC– MC
Describe the relationships between MC and ATC, AVC, respectively
Average Total Cost Curve for Ben’s Boots
The average total cost curve at Ben’s Boots is U-shaped. At low levels of output, average total cost falls because the “spreading effect” of falling average fixed cost dominates the “diminishing returns effect” of rising average variable cost. At higher levels of output, the opposite is true and average total cost rises.
Four curves together: Marginal Cost and Average Cost Curves
The Relationship Between the Average Total Cost and the Marginal Cost
Average Variable Cost and Average Total Cost
Employeesper day
0 0 0 40
1 80 12 0.150 52 0.650
2 200 24 0.120 64 0.320
3 260 36 0.138 76 0.292
4 300 48 0.160 88 0.293
5 330 60 0.182 100 0.303
6 350 72 0.206 112 0.320
7 362 84 0.232 124 0.343
Bottlesper day
Variable cost
($/day)
Average variable cost
($/unit of output)
Total cost
($/day)
Average total cost($/unit of output)
0.15
0.10
0.20
0.30
0.40
0.60
1.00
Marginal cost
($/bottle)
Table 6.4, P.176
80 200 260 300
330 350
362
Upward-sloping MCcorresponds todiminishing returns
MC = AVC & ATCat their minimumpoints
MC
Co
st (
$/b
ott
le)
0.05
Output (bottles/day)
0.100.150.200.250.300.350.400.450.500.550.600.65
ATC
AVC
The Marginal, Average Variable, and Average Total Cost Curves
More Realistic Cost Curves
Marginal cost curves do not always slope upward. The benefits of specialization of labor can lead to increasing returns at first represented by a downward-sloping marginal cost curve. Once there are enough workers to permit specialization, however, diminishing returns set in.
Short-Run Costs: Summary
at Q=0, VC=0, but FC>0 when MC is declining, ATC and AVC bo
th decline at an increasing rate when MC starts increasing, ATC and A
VC may both be decreasing but at a decreasing rate
MC intersects AVC and ATC at their minimum, respectively
Questions to Consider
Why will MC increase before AVC increases?
Why will MC increase before ATC increases?
Why will AVC increase before ATC increases?
Why will MC intersect AVC and ATC at their minimum, respectively?
Short-Run versus Long-Run Costs
In the short-run: fixed cost is completely outside the control of a firm.
In the long-run: all inputs are variable Fixed cost in SR may also be varied in L
R In the long run a firm’s fixed cost becom
es variable
The Long-Run Average Total Cost Curve
The long-run average total cost curve shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.
Short-Run and Long-Run Average Total Cost Curves
Economies and Diseconomies of Scale
There are economies of scale when long-run average total cost declines as output increases.
There are diseconomies of scale when long-run average total cost increases as output increases.
There are constant returns to scale when long-run average total cost is constant as output increases.
Relations BetweenSR Costs and SR Production
Q=f (L, K), and TC=TVC+TFC=wL + rK AVC=TVC/Q=wL/AP*L=w/AP SMC=dTVC/dQ=d(wL)/dQ
=w(dL/dQ)
=w/MP