Bài giảng Managerial Economics - Chapter 8 Production & Cost in the Short Run

Chapter 8Production & Cost in the Short RunBasic Concepts of Production TheoryProduction functionMaximum amount of output that can be produced from any specified set of inputs, given existing technologyTechnical efficiencyAchieved when maximum amount of output is produced with a given combination of inputsEconomic efficiencyAchieved when firm is producing a given output at the lowest possible total cost2Basic Concepts of Production TheoryInputs are considered variable or fixed depending on how readily their usage can be changedVariable inputAn input for which the level of usage may be changed quite readilyFixed inputAn input for which the level of usage cannot readily be changed and which must be paid even if no output is producedQuasi-fixed inputAn input employed in a fixed amount for any positive level of output that need not be paid if output is zero3Basic Concepts of Production TheoryShort runAt least one input is fixedAll changes in output achieved by changing usage of variable inputsLong runAll inputs are variableOutput changed by varying usage of all inputs4Short Run ProductionIn the short run, capital is fixedOnly changes in the variable labor input can change the level of outputShort run production function5Average & Marginal ProductsAverage product of laborAP = Q/LMarginal product of laborMP = Q/LWhen AP is rising, MP is greater than APWhen AP is falling, MP is less than APWhen AP reaches it maximum, AP = MPLaw of diminishing marginal productAs usage of a variable input increases, a point is reached beyond which its marginal product decreases6Total, Average, & Marginal Products of Labor, K = 2 (Table 8.2)Number of workers (L)Total product (Q)Average product (AP=Q/L)Marginal product (MP=Q/L)001522112317042205258628673048314931810314 --5551.6 525656.747.743.439.335.331.4 --5038 5260582818104-47Total, Average & Marginal Products, K = 2 (Figure 8.1)8Total, Average & Marginal Product CurvesPanel APanel BTotal productAverage productMarginal productQ1L1L1L2Q2L2L0Q0L09Short Run Production CostsTotal variable cost (TVC)Total amount paid for variable inputsIncreases as output increasesTotal fixed cost (TFC)Total amount paid for fixed inputsDoes not vary with outputTotal cost (TC) TC = TVC + TFC10Short-Run Total Cost Schedules (Table 8.4)Output (Q)Total fixed cost (TFC)Total variable cost (TVC)Total Cost (TC=TFC+TVC)0$6,000100 6,000200 6,000300 6,000400 6,000500 6,000600 6,000 $ 014,00022,000 4,0006,0009,00034,000$ 6,00020,00028,000 10,00012,00015,00040,00011Total Cost Curves (Figure 8.3)12Average Costs•••13Short Run Marginal CostShort run marginal cost (SMC) measures rate of change in total cost (TC) as output varies14Average & Marginal Cost Schedules (Table 8.5)Output (Q)Average fixed cost (AFC=TFC/Q)Average variable cost (AVC=TVC/Q)Average total cost (ATC=TC/Q= AFC+AVC)Short-run marginal cost (SMC=TC/Q)0100200300400500600 --1512 $60302010--3544 $40303056.7--5056 $100605066.7--5080 $40203012015Average & Marginal Cost Curves (Figure 8.3)16Short Run Average & Marginal Cost Curves (Figure 8.5)17Short Run Cost Curve RelationsAFC decreases continuously as output increasesEqual to vertical distance between ATC & AVCAVC is U-shapedEquals SMC at AVC’s minimumATC is U-shapedEquals SMC at ATC’s minimum18Short Run Cost Curve RelationsSMC is U-shapedIntersects AVC & ATC at their minimum pointsLies below AVC & ATC when AVC & ATC are fallingLies above AVC & ATC when AVC & ATC are rising19In the case of a single variable input, short-run costs are related to the production function by two relationsRelations Between Short-Run Costs & ProductionA20Short-Run Production & Cost Relations (Figure 8.6)21Relations Between Short-Run Costs & ProductionWhen marginal product (average product) is increasing, marginal cost (average cost) is decreasingWhen marginal product (average product) is decreasing, marginal cost (average variable cost) is increasingWhen marginal product = average product at maximum AP, marginal cost = average variable cost at minimum AVC22