technology: an economic definition
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Learning Objective 10.1. Technology: An Economic Definition. Technology The processes a firm uses to turn inputs into outputs of goods and services. Technological change A change in the ability of a firm to produce a given level of output with a given quantity of inputs. - PowerPoint PPT PresentationTRANSCRIPT
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
Fernando & Yvonn Quijano
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Chapter
10
Technology, Production, and Costs
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Technology: An Economic Definition
Learning Objective 10.1
Technology The processes a firm uses to turn inputs into outputs of goods and services.
Technological change A change in the ability of a firm to produce a given level of output with a given quantity of inputs.
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The Short Run and the Long Run in Economics
Learning Objective 10.2
Short run The period of time during which at least one of a firm’s inputs is fixed.
Long run The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.
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The Short Run and the Long Run in Economics
Learning Objective 10.2
The Difference between Fixed Costs and Variable Costs
Total cost The cost of all the inputs a firm uses in production.
Variable costs Costs that change as output changes.
Fixed costs Costs that remain constant as output changes.
TC = FC + VC
Total Cost = Fixed Cost + Variable Cost
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Learning Objective 10.2
Fixed Costs in the Publishing IndustryMaking
the
Connection
Publishers consider the salaries of editors to be a fixed cost.
COST AMOUNT
Salaries and benefits $437,500
Rent 75,000
Utilities 20,000
Supplies 6,000
Postage 4,000
Travel 8,000
Subscriptions, etc. 4,000
Miscellaneous 5,000
Total $559,500
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The Short Run and the Long Run in Economics
Learning Objective 10.2
Implicit Costs versus Explicit Costs
Opportunity cost The highest-valued alternative that must be given up to engage in an activity.
Explicit cost A cost that involves spending money.
Implicit cost A nonmonetary opportunity cost.
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The Short Run and the Long Run in Economics
Learning Objective 10.2
Table 10-1
Jill Johnson’s Costs per Year
Pizza dough, tomato sauce, and other ingredients $20,000
Wages $48,000
Interest payments on loan to buy pizza ovens $10,000
Electricity $6,000
Lease payment for store $24,000
Foregone salary $30,000
Foregone interest $3,000
Economic depreciation 10,000
Total $151,000
Implicit Costs versus Explicit Costs
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The Short Run and the Long Run in Economics
Learning Objective 10.2
Table 10-2
Short-Run Production and Cost
at Jill Johnson’s Restaurant
The Production Function
QUANTITY OF WORKERS
QUANTITY OF
PIZZA OVENS
QUANTITY OF PIZZAS
PER WEEK
COST OF PIZZA OVENS (FIXED COST)
COST OF WORKERS
(VARIABLE COST)TOTAL COST
OF PIZZAS
COST PER PIZZA
(AVERAGE TOTAL COST)
0 2 0 $800 $0 $800 —
1 2 200 800 650 1,450 $7.25
2 2 450 800 1,300 2,100 4.67
3 2 550 800 1,950 2,750 5.00
4 2 600 800 2,600 3,400 5.67
5 2 625 800 3,250 4,050 6.48
6 2 640 800 3,900 4,700 7.34
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The Short Run and the Long Run in Economics
Learning Objective 10.2
The Production Function
Production function The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.
A First Look at the Relationship between Production and Cost
Average total cost Total cost divided by the quantity of output produced.
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The Short Run and the Long Run in Economics
Learning Objective 10.2
FIGURE 10-1
Graphing Total Cost and Average Total Cost at Jill Johnson’s Restaurant
A First Look at the Relationship between Production and Cost
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The Marginal Product of Labor and theAverage Product of Labor
Learning Objective 10.3
Marginal product of labor The additional output a firm produces as a result of hiring one more worker.
QUANTITY OF WORKERS
QUANTITY OF PIZZA OVENS
QUANTITY OF PIZZAS
MARGINALPRODUCT OF LABOR
0 2 0 —
1 2 200 200
2 2 450 250
3 2 550 100
4 2 600 50
5 2 625 25
6 2 640 15
Table 10-3
The Marginal Product of Labor at Jill Johnson’s Restaurant
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The Marginal Product of Labor and the Average Product of Labor
Learning Objective 10.3
The Law of Diminishing Returns
Law of diminishing returns The principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.
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The Marginal Product of Labor and the Average Product of Labor
Learning Objective 10.3
Graphing Production
FIGURE 10-2
Total Output and theMarginal Product of Labor
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The Marginal Product of Labor and the Average Product of Labor
Learning Objective 10.3
The Relationship between Marginal and Average Product
Average product of labor The total output produced by a firm divided by the quantity of workers.
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The Marginal Product of Labor and the Average Product of Labor
Learning Objective 10.3
An Example of Marginal and Average Values: College Grades
FIGURE 10-3
Marginal and Average GPAs
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The Relationship between Short-RunProduction and Short-Run Cost
Learning Objective 10.4
Marginal Cost
Marginal cost The change in a firm’s total cost from producing one more unit of a good or service.
ΔTCMC
ΔQ
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The Relationship between Short-RunProduction and Short-Run Cost
Learning Objective 10.4
Why Are the Marginal and Average Cost Curves U Shaped?
FIGURE 10-4
Jill Johnson’s Marginal Cost and Average Total Cost of Producing Pizzas
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Solved Problem 10-4The Relationship between Marginal Cost and Average Cost
Learning Objective 10.4
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Graphing Cost Curves
Learning Objective 10.5
Average fixed cost Fixed cost divided by the quantity of output produced.
Average variable cost Variable cost divided by the quantity of output produced.
ATC = AFC + AVC
FCQAverage fixed cost = AFC =
Average variable cost = AVC =VC
Q
Average total cost = ATC =TCQ
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Graphing Cost Curves
Learning Objective 10.5
FIGURE 10-5
Costs at Jill Johnson’s Restaurant
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Graphing Cost Curves
Learning Objective 10.5
1 The marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves are all U shaped, and the marginal cost curve intersects the average variable cost and average total cost curves at their minimum points. When marginal cost is less than either average variable cost or average total cost, it causes them to decrease. When marginal cost is above average variable cost or average total cost, it causes them to increase. Therefore, when marginal cost equals average variable cost or average total cost, they must be at their minimum points.
2 As output increases, average fixed cost gets smaller and smaller. This happens because in calculating average fixed cost, we are dividing something that gets larger and larger—output—into something that remains constant—fixed cost. Firms often refer to this process of lowering average fixed cost by selling more output as “spreading the overhead.” By “overhead” they mean fixed costs.
3 As output increases, the difference between average total cost and average variable cost decreases. This happens because the difference between average total cost and average variable cost is average fixed cost, which gets smaller as output increases.
Understand the following three key facts about Figure 10-5:
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Costs in the Long Run
Learning Objective 10.6
Long-run average cost curve A curve showing the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.
Economies of scale The situation when a firm’s long-run average costs fall as it increases output.
Economies of Scale
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Costs in the Long Run
Learning Objective 10.6
FIGURE 10-6
The Relationship between Short-Run Average Cost and Long-Run Average Cost
Economies of Scale
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Costs in the Long Run
Learning Objective 10.6
Long-Run Average Total Cost Curves for Bookstores
Constant returns to scale The situation when a firm’s long-run average costs remain unchanged as it increases output.
Minimum efficient scale The level of output at which all economies of scale are exhausted.
Diseconomies of scale The situation when a firm’s long-run average costs rise as the firm increases output.
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Solved Problem 10-6Using Long-Run Average Cost Curves to Understand Business Strategy
Learning Objective 10.6
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Costs in the Long Run
Learning Objective 10.6
Don’t Let This Happen to YOU!DON’T CONFUSE DIMINISHING RETURNS WITH DISECONOMIES OF SCALE
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TERM DEFINITIONSYMBOLS AND EQUATIONS
Total cost The value of all the inputs used by a firm TC
Fixed cost Costs that remain constant when a firm’s level of output changes
FC
Variable cost Costs that change when the firm’s level of output changes
VC
Marginal cost The increase in total cost resulting from producing another unit of output
Average total cost Total cost divided by the quantity of units produced
Average fixed cost Fixed cost divided by the quantity of units produced
Average variable cost Variable cost divided by the quantity of units produced
Implicit cost A nonmonetary opportunity cost ―
Explicit cost A cost that involves spending money ―
Q
TCATC
Q
FCAFC
Q
VCAVC
Q
TCMC
Table 10-4A Summary of Definitions of Cost
Conclusion
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An Inside LOOK Lower Manufacturing Costs Push Down the Price of Flat-Panel TVs
Flat-Panel TVs, Long Touted, Finally Are Becoming the Norm
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IsoquantsAppendix
An Isoquant Graph
FIGURE 10A-1
Isoquants
Isoquant A curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output.
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IsoquantsAppendix
The Slope of an Isoquant
Marginal rate of technical substitution (MRTS) The slope of an isoquant, or the rate at which a firm is able to substitute one input for another while keeping the level of output constant.
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Isocost LinesAppendix
Isocost line All the combinations of two inputs, such as capital and labor, that have the same total cost.
Graphing the Isocost Line
FIGURE 10A-2
An Isocost Line
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Isocost LinesAppendix
The Slope and Position of the Isocost Line
FIGURE 10A-3
The Position of the Isocost Line
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Choosing the Cost-Minimizing Combination of Capital and Labor
Appendix
FIGURE 10A-4
Choosing Capital and Labor to Minimize Total Cost
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Choosing the Cost-Minimizing Combination of Capital and Labor
Appendix
FIGURE 10A-5
Changing Input Prices Affects the Cost-Minimizing Input Choice
Different Input Price Ratios Lead to Different Input Choices
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The Changing Input Mix in Walt Disney Film Animation
Makingthe
Connection
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Appendix
Another Look at Cost Minimization
r
MP
w
MP KL
Choosing the Cost-Minimizing Combination of Capital and Labor
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Solved Problem 10A-1Determining the Optimal Combination of Inputs
Marginal product of capital 3,000 pizzas
Marginal product of labor 1,200 pizzas
Wage rate $300 per week
Rental price of ovens $600 per week
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Appendix
The Expansion Path
FIGURE 10A-6
The Expansion Path
Expansion path A curve that shows a firm’s cost-minimizing combination of inputs for every level of output.