Transcript srcosts99

COSTS OF PRODUCTION
General principle: If you know the technology
of production (the production function or total
product curve), and if you know the prices of
the inputs to production, then you can find the
firm’s costs at any level of output.
Short-run costs
slide 1
Put another way:
Costs are determined by the technology of
production and input prices.
Let’s start with the total product curve for tax preparation
services from the last section, and show how to get to
costs of production.
Short-run costs
slide 2
TOTAL
LABOR PRODUCT
0
0
1
3
2
15
3
36
4
48
5
56
6
62
7
66
8
68
Short-run costs
slide 3
Suppose labor costs $48 per day.
PL = $48/day
If labor is the only variable input, we can find the
total variable costs at each output level.
Short-run costs
slide 4
TOTAL
LABOR PRODUCT
0
0
1
3
2
15
3
36
4
48
5
56
6
62
7
66
8
68
Short-run costs
PLL =
TVC
0
48
96
144
192
384
slide 5
THE TOTAL VARIABLE COST CURVE shows the
total variable cost at each level of output.
In the total variable cost curve the independent
variable is OUTPUT, and the dependent variable
is TOTAL VARIABLE COSTS.
Short-run costs
slide 7
PLOT THE REST OF THE POINTS TO
SHOW TVC.
$
700
When output is 56,
total variable costs
are $240.
600
500
400
300
200
100
0
Q
0
Short-run costs
20
40
60
80
slide 8
If there are fixed costs (costs associated with inputs
that can’t be changed), then we can add these to
the total variable costs to get total costs.
Total Cost = Fixed Cost + Total Variable Cost
TC = FC + TVC
Short-run costs
slide 10
The total cost curve shows the total cost of
producing each output.
$
700
600
TC
500
TVC
400
300
200
100
0
Short-run costs
20
40
60
Q
80
slide 11
Here’s another total cost curve that we’ll use to
introduce the concepts of average cost and
marginal cost.
Short-run costs
slide 12
Q
0
1
2
3
4
5
6
7
8
9
10
11
Short-run costs
TC
50.0
63.0
71.0
76.0
82.4
97.0
130.0
174.0
233.0
314.0
460.0
656.0
slide 13
700 TC($)
TC
600
500
400
300
200
100
0
0
Short-run costs
2
4
6
8
10
12
14
slide 14
AVERAGE COST
Average cost: Cost per unit of output. Total cost
divided by output. TC/Q.
Average cost curve: The curve that shows average
cost as a function of output. Output is the
independent variable and average cost is the
dependent variable.
Short-run costs
slide 15
Q
0
1
2
3
4
5
6
7
8
9
10
11
Short-run costs
TC
50.0
63.0
71.0
76.0
82.4
97.0
130.0
174.0
233.0
314.0
460.0
656.0
AC
63.0
35.5
25.3
20.6
19.4
AC = TC/Q
= 97/5
34.9
46.0
59.6
slide 16
PLOT THE REST OF THE AC CURVE.
AC($/Q)
120
100
80
AC
60
40
20
0
Q
0
Short-run costs
2
4
6
8
10
12
14
slide 18
AVERAGE VARIABLE COSTS CAN BE
SHOWN AT THE SAME TIME.
Q
0
1
2
3
4
5
6
7
8
9
10
11
Short-run costs
TC
50.0
63.0
71.0
76.0
82.4
97.0
130.0
174.0
233.0
314.0
460.0
656.0
AC
AVC
63.0
35.5
25.3
20.6
19.4
21.7
24.9
29.1
34.9
46.0
59.6
13.0
10.5
8.7
8.1
9.4
13.3
17.7
22.9
29.3
41.0
55.1
slide 20
$/Q
120
100
80
AC
60
AVC
40
20
Q
0
0
Short-run costs
2
4
6
8
10
12
14
slide 21
MARGINAL COST
Marginal cost: The change in total cost per unit
change in output. The increase in cost due to
producing one more unit of output. The slope of
the total cost curve. TC / Q.
Marginal cost curve: The curve that shows marginal
cost as a function of output. The independent
variable is output. The dependent variable is
marginal cost.
Short-run costs
slide 22
Q
0
1
2
3
4
5
6
7
8
9
10
11
Short-run costs
TC
50.0
63.0
71.0
76.0
82.4
97.0
130.0
174.0
233.0
314.0
460.0
656.0
AC
MC
63.0
35.5
25.3
20.6
19.4
21.7
24.9
29.1
34.9
46.0
59.6
13
8
5
6.4
14.6
33
The marginal cost
of the 4th unit of
output is 6.4
=(82.4-76)/(4-3)
146
196
slide 23
AC, MC
MC
120
100
AC
80
AC
60
40
Q
20
0
0
Short-run costs
2
4
6
8
10
12
14
slide 25
Of course, the marginal and average cost curves must
conform to the usual rules about marginal and average
curves.
1) When the average is rising, the marginal quantity
must be greater than the average quantity.
2) When the average is falling, the marginal quantity
must be less than the average quantity.
3) When the average is neither rising nor falling (at a
maximum or minimum), average and marginal are
equal.
Short-run costs
slide 27
Notice that the general shape of the AC and MC
curves can be deduced by looking as the TC curve.
(Review, if necessary, the techniques for finding AP
and MP curves by inspecting TP curves covered in
the last section.)
Short-run costs
slide 28
WHAT WOULD THE AVERAGE VARIABLE COST CURVE LOOK LIKE
IF WE WERE TO PUT IT ON THE SAME DIAGRAM?
$/Q
MC
120
100
80
AC
60
40
20
0
Q
0
Short-run costs
2
4
6
8
10
12
14
slide 29
$
700
TC
600
500
400
300
200
100
Q
0
0
2
4
6
8
10
$/Q
12
14
MC
120
100
Two alternative ways
of showing
information
about the firm’s costs.
80
AC
60
40
20
Q
0
0
2
4
Short-run costs
6
8
10
12
14
slide 31
COST CURVE SUMMARY:
Costs depend output, technology, and input
prices.
There are two ways to depict a firm’s costs:
1) Total cost curves
2) Average and marginal cost curves
Short-run costs
slide 32
CHANGES IN COSTS
What are the effects on costs of changes in
a) input prices?
b) the technology of production?
c) taxes on output?
Short-run costs
slide 33
What are the effects on a firm’s costs of an
increase in the price of an input?
The increase in the price of a variable input will raise
the total variable costs of production at each output
level.
This has the effect of raising both marginal and
average costs.
Short-run costs
slide 34
350
$
TC’ is the total cost
curve when the price
of a variable input is
increased.
TC
’
TC
300
250
200
150
100
50
0
0
2
4
6
8
10
12
Q
14
Increasing the price of an
input raises both average
and marginal costs.
$/Q
60
50
MC’
40
MC
30
AC’
20
AC’ and MC’ show the
effect of higher input
prices.
AC
10
0
0
2
4
Short-run costs
6
8
10
12
14
Q
slide 35
An improvement in technology lowers the cost of
producing each level of output.
Marginal and average costs of production will be
lower as a result.
Short-run costs
slide 36
$
350
TC
300
TC’
250
IMPROVEMENTS IN
TECHNOLOGY REDUCE
COSTS OF PRODUCTION.
200
150
100
50
0
0
2
4
6
8
10
12
14
Q
$/Q
60
50
MC
40
MC’
AC
AC’
30
20
Costs fall because the
same output can be
produced using fewer
inputs.
10
0
0
2
4
Short-run costs
6
8
10
12
Q
14
slide 37
Imposing a tax per unit of output will raise total cost
by tQ, where t is the tax per unit and Q is the
number of units of output sold.
The tax will raise both average and marginal costs by
exactly the amount of the tax per unit of output.
Short-run costs
slide 38
$
TC+3Q
350
300
TC
A per unit tax of $3 will
raise total cost by $3Q, or
$3 times the quantity
produced.
250
200
150
100
50
0
0
2
4
6
8
10
12
14
Q
$/Q
60
MC+3
50
MC
AC+3
AC
40
30
A per unit tax of $3 will
raise average and marginal
cost by exactly $3.
20
10
Q
0
0
2
4
Short-run costs
6
8
10
12
14
slide 39
What is a SUBSIDY, and how
does a per unit subsidy affect
a firm’s costs?
Short-run costs
slide 40
CHECK UP: WHAT DO THE AC AND MC
CURVES LOOK LIKE FOR THE
FOLLOWING TOTAL COST CURVES?
$
TC
Q
Short-run costs
slide 42
$
TC
Q
Short-run costs
slide 44
$
TC
Q
Short-run costs
slide 46
SUMMARY
Increases in the prices of inputs will raise the total,
average, and marginal costs of production.
Improvements in technology lower total, average,
and marginal costs of production.
A per unit tax of t will raise total costs by tQ, and
will raise marginal and average costs by exactly t.
Short-run costs
slide 48