mgr intro farnham ch5 prod cost sr

8/3/2019 Mgr Intro Farnham Ch5 Prod Cost SR

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Chapter 5

Production and Cost Analysis inthe Short-Run


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Production Function

Aproduction

function describes therelationship between a

flow of inputs and the

resulting flow of

outputs in a productionprocess during a given

period of time.

Q = f(L, K, M, )

whereQ = quantity of output

L = quantity of labor

input

K = quantity of capitalinput

M = quantity of materials

input

2 Copyright 2010 Pearson Education, Inc.Publishing as Prentice Hall


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Fixed and Variable Inputs

Afixedinputis an

input whose quantitya manager cannot

change during a

given period of time.

Avariable inputis an

input whose quantitya manager can

change during a

given period of time.



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Short-Run vs. Long-Run

The short-run is a period of time during which

at least one input is fixed, while the long-run isa period of time during which all inputs are

variable.



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Total Product

The total quantity of

output produced withgiven quantities of

fixed and variable

inputs.

TP or Q = f(L, K ), where

TP or Q = total productor total quantity

produced

L = quantity of labor

input (variable)

K = quantity of capital

(fixed)



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Average Product

The amount of output

per unit of variableinput.

APL = TPL or QL,where

APL = average product

of labor



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Marginal Product

The additional output

produced with anadditional unit of

variable input.

MPL = TPL or

QLwhere

MPL = marginal

product of labor



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Total Product Curve



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Average and Marginal ProductCurves



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Law of Diminishing MarginalReturns

The phenomenon illustrated by that region of

the marginal product curve where the curve ispositive, but decreasing, so that total product is

increasing at a decreasing rate.



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Cost Function

A mathematical or graphic expression that

shows the relationship between the cost ofproduction and the level of output, all other

factors held constant.



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Opportunity Cost

The economic measure of cost that reflects the

use of resources in one activity, such as aproduction process by one firm, in terms of the

opportunities forgone in undertaking the next

best alternative activity.



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Explicit and Implicit Costs

A cost is explicit if it is

reflected in a paymentto another individual,

such as a wage paid to

a worker, that is

recorded in a firms

bookkeeping or

accounting system.

A cost that represents

the value of using aresource that is not

explicitly paid out and

is often difficult to

measure because it is

typically not recorded

in a firms accounting

system.



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Profit

The difference between the total revenue a firm

receives from the sale of its output and thetotal cost of producing that output.



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Accounting vs. Economic Profit

Accounting profit is

the differencebetween total

revenue and total

cost where cost

includes only theexplicit costs of

production.

Economic profit is

the differencebetween total

revenue and total

cost where cost

includes both theexplicit and any

implicit costs of

production.



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Short Run Cost Function

A cost function for a short-run production

process in which there is at least one fixedinput of production.



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Fixed vs. Variable Costs

Fixed cost is the total

cost of using thefixed input, which

remains constant

regardless of the

amount of outputproduced.

Variable cost is the

total cost of usingthe variable input,

which increases as

more output is

produced.



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Short Run Costs

COST FUNCTION DEFINITION

Total fixed cost TFC= (PK) x(K)Total variable cost TVC= (PL) x(L)

Total cost TC= TFC+ TVC

Average fixed cost AFC= TFC Q

Average variable cost AVC= TVC Q

Average total cost ATC= TC Q = AFC+ AVC

Marginal cost MC= TC Q = TVC Q



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Total Cost Curves



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Average and Marginal Cost Curves



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Relationship Between Short RunProduction and Cost

21

AC

MC

Q1 Q2

Copyright 2010 Pearson Education, Inc.Publishing as Prentice Hall

mgr intro farnham ch5 prod cost sr

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