chapter 8. the meaning of costs opportunity costsopportunity costs measuring a firm’s opportunity...
TRANSCRIPT
Chapter 8Chapter 8Chapter 8Chapter 8
The Meaning of CostsThe Meaning of CostsThe Meaning of CostsThe Meaning of Costs
• Opportunity costsOpportunity costs
• Measuring a firm’s opportunity costsMeasuring a firm’s opportunity costs
– factors not owned by the firm: explicit costsfactors not owned by the firm: explicit costs
– factors already owned by the firm: implicit factors already owned by the firm: implicit costscosts
– irrelevance of historic costs and replacement irrelevance of historic costs and replacement costscosts
Production in the Short runProduction in the Short runProduction in the Short runProduction in the Short run
• Production functionsProduction functions
• Long-run and short-run production: Long-run and short-run production: – fixed and variable factorsfixed and variable factors
• The law of diminishing returnsThe law of diminishing returns
• The short-run production function:The short-run production function:– total physical product (total physical product (TPPTPP))
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar
Number of workers
012345678
TPP 0 310243640424240
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar TPP
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar TPP
a
b
Diminishing returnsset in here
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Number of farm workers
To
nne
s o
f wh
eat
pro
du
ced
pe
r ye
ar TPP
a
b
d
Maximum output
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
Production in the Short runProduction in the Short runProduction in the Short runProduction in the Short run
• Production functionsProduction functions
• Long-run and short-run production: Long-run and short-run production: – fixed and variable factorsfixed and variable factors
• The law of diminishing returnsThe law of diminishing returns
• The short-run production function:The short-run production function:– total physical product (total physical product (TPPTPP))
– average physical product (average physical product (APPAPP))
Production in the Short runProduction in the Short runProduction in the Short runProduction in the Short run
• Production functionsProduction functions
• Long-run and short-run production: Long-run and short-run production: – fixed and variable factorsfixed and variable factors
• The law of diminishing returnsThe law of diminishing returns
• The short-run production function:The short-run production function:– total physical product (total physical product (TPPTPP))
– average physical product (average physical product (APPAPP))
– marginal physical product (marginal physical product (MPPMPP))
Production in the Short runProduction in the Short runProduction in the Short runProduction in the Short run
• Production functionsProduction functions
• Long-run and short-run production: Long-run and short-run production: – fixed and variable factorsfixed and variable factors
• The law of diminishing returnsThe law of diminishing returns
• The short-run production function:The short-run production function:– total physical product (total physical product (TPPTPP))
– average physical product (average physical product (APPAPP))
– marginal physical product (marginal physical product (MPPMPP))
– the graphical relationship between the graphical relationship between TPPTPP, , APPAPP and and MPPMPP
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
Number offarm workers (L)
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
Number offarm workers (L)
TPP = 7
L = 1
MPP = TPP / L = 7
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
MPP
Number offarm workers (L)
Number offarm workers (L)
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
APP = TPP / L
Number offarm workers (L)
Number offarm workers (L)
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
Diminishing returnsset in here
Number offarm workers (L)
Number offarm workers (L)
b
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Maximumoutputb
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
0
10
20
30
40
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
TPP
-2
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8
Ton
nes
of w
heat
per
yea
r
APP
MPP
b
b
d
d
Number offarm workers (L)
Number offarm workers (L)
Slope = TPP / L= APP
c
c
Wheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farmWheat production per year from a particular farm
Costs in the Short runCosts in the Short runCosts in the Short runCosts in the Short run
• Costs and inputsCosts and inputs
– costs and the productivity of factorscosts and the productivity of factors
– costs and the price of factorscosts and the price of factors
• Fixed costs and variable costsFixed costs and variable costs
• Total costsTotal costs
– total fixed cost (total fixed cost (TFCTFC))
– total variable cost (total variable cost (TVCTVC))
– total cost (total cost (TC = TFC + TVCTC = TFC + TVC))
Total costs for firm XTotal costs for firm XTotal costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TFC
Output(Q)
01234567
TFC(£)
1212121212121212
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
TFC
Output(Q)
01234567
TFC(£)
1212121212121212
TVC(£)
010162128406091
Total costs for firm XTotal costs for firm XTotal costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TC
TVC
TFC
Output(Q)
01234567
TFC(£)
1212121212121212
TVC(£)
010162128406091
TC(£)
12222833405272
103
Total costs for firm XTotal costs for firm XTotal costs for firm XTotal costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
TFC
Diminishing marginal returnsset in here
TC
Total costs for firm XTotal costs for firm XTotal costs for firm XTotal costs for firm X
Costs in the Short runCosts in the Short runCosts in the Short runCosts in the Short run
• Marginal costMarginal cost– marginal cost (marginal cost (MCMC) and the law of diminishing ) and the law of diminishing
returnsreturns– the relationship between the marginal and the relationship between the marginal and
total cost curvestotal cost curves
Marginal costMarginal costMarginal costMarginal cost
Output (Q)
Co
sts
(£)
MC
x
Costs in the Short runCosts in the Short runCosts in the Short runCosts in the Short run
• Marginal costMarginal cost– marginal cost (marginal cost (MCMC) and the law of diminishing ) and the law of diminishing
returnsreturns– the relationship between the marginal and the relationship between the marginal and
total cost curvestotal cost curves
• Average costAverage cost– average fixed cost (average fixed cost (AFCAFC))– average variable cost (average variable cost (AVCAVC))– average (total) cost (average (total) cost (ACAC))
Costs in the Short runCosts in the Short runCosts in the Short runCosts in the Short run
• Marginal costMarginal cost– marginal cost (marginal cost (MCMC) and the law of diminishing ) and the law of diminishing
returnsreturns– the relationship between the marginal and the relationship between the marginal and
total cost curvestotal cost curves
• Average costAverage cost– average fixed cost (average fixed cost (AFCAFC))– average variable cost (average variable cost (AVCAVC))– average (total) cost (average (total) cost (ACAC))
• Relationship between average and Relationship between average and marginal costmarginal cost
Average and marginal costsAverage and marginal costsAverage and marginal costsAverage and marginal costs
Output (Q)
Co
sts
(£)
MC
x
Output (Q)
Co
sts
(£)
MC
x
AVC
y
Average and marginal costsAverage and marginal costsAverage and marginal costsAverage and marginal costs
Output (Q)
Co
sts
(£)
MC
x
y
AFC
AVC
Average and marginal costsAverage and marginal costsAverage and marginal costsAverage and marginal costs
Output (Q)
Co
sts
(£)
AFC
AVC
MC
x
AC
y
z
Average and marginal costsAverage and marginal costsAverage and marginal costsAverage and marginal costs