cost theory analysis
TRANSCRIPT
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Objectives of this presentation
To study about Production theory
To study about production efficiency
To study about Cost theory
To relate the cost with production To study to achieve maximum profit for an
organization To study to take decision which will result
maximum financial benefit for the organization
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Outline of Presentation
1. Production
2. Short-run Production and Cost
3. Long-run Production and Cost
4. Cost Estimation Technique
5. Conclusion
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1. Production
Definition
Input OutputValue added
Transformation
Production processes increase the ability of inputs (or resources) to satisfy wants by:
a. Change in physical characteristicsb. Change in locationc. Change in timed. Change in ownership
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1.1. Production
Production Function
Q = f (L,K,Technology,………….)
Cobb-Douglas production function
Q = .
Where, Q represents output,
K represents Capital
and L represents Labor
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1.2. Time and Production
Generally, four time periods are used in the analysis of production, they are:
Market Period Short-run Long-run The very Long-run
Most of the economists consider either Long-run or short-run.
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2. Short-run Production and Cost2.1. Production in the Short-run
Production function can be represented as
Q = f(L,K)
Here, Bar sign upon K indicates that K is fixed.
So the Production function can be represented as
Q = f(L)
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2.1. Production in the Short-run
Common Terminology: Total Product: Sum of total output (Q). Average Product: AP = = Marginal Product:
MP = = Technical Efficiency:
TE = Economic Efficiency:
EE=
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2.1. Production in the Short-run
Fig 1a: Graphical Representation of Total Product
Fig 1b: Graphical Representation of Average and Marginal Product
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2.2. Sort-run Cost
Some common Terms about cost: Opportunity Cost Implicit and Explicit Cost Total Cost (TC) Total Fixed Cost (TFC) Total Variable Cost (TVC) Average Fixed Cost (AFC) Average Variable Cost (AVC) Marginal Cost (MC) Average Total Cost (ATC) Total Revenue (TR) Marginal Revenue (MR)
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2.2. Short-run Cost
Fig 2a: Graphical Representation of Total Cost Curve
Fig 2b: Graphical Representation of AFC, AVC, AC and MC
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3. Long-run Production and Cost
Long-run Production function can be represented as
Q = f(L,K)
Where, both the inputs are variable but technology is
same.
Cobb-Douglas production function can also be used to explain this Production Function.
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3.1. Isoquant
Fig 3: Graphical Representation of Isoquant
The characteristic of Isoquant is that, it is downward sloping.
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3.1. Isoquant
Fig 4a: Isoquant when inputs are perfect substitutes
Fig 4b: Isoquant when inputs are perfect complements
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3.2. Marginal Rate of Technical Substitution (MRTS)
MRTS can be defined using following equation
MRTS = - .
It is possible to relate MRTS with Marginal Product by using following equation
MRTS = - .=
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3.6. Returns to Scale
Consider a production function as following form
Q = f (L,K)
Now if the input will change the variation of out can be represented as
zQ = f (cL,cK)
Here, c & z are the proportionate change of input and output
Now, If z>c, Increasing Returns to Scale
If z<c, Decreasing Returns to Scale
If z=c, Constant Returns to Scale
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3.7. Economies of Scope (SC)
If Joint production cost of two product is C(X,Y) and C(X) & C(Y) are the individual production cost of product X & Y the economies of scope will exist if
C(X,Y) < C(X) + C(Y)
The Degree to which SC exist is
SC= .
Diseconomies of scope will exist if
C(X,Y) > C(X) + C(Y)
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3.9. Long-run Average and Marginal Cost Curve
Fig 9b: Long-run Average Cost as the Planning Horizon
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4. Cost Estimation Technique
If we consider a Total Cost Function as following
TC = .
Average Total Cost can be calculated in this way
ATC = .
Marginal Cost can be calculated in this way
MC = .
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5. Conclusion
Analysis of production and cost is very important for an organization.
A good manager will concentrate on technical and economic efficiency.
Study of production and cost will help a manager to take decision for maximizing organization profit.
At last it can be concluded in this way that, study and improvement of our knowledge about discussed topics help us to fulfill our presentation objectives.