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1、郑重声明 此课件只能用于同学自己学习参考，未经书面授权不得做其他用途，尤其是不得做商业用途，也不得作为教学课件使用（对他人授课）。课件作者Chapter 6 ProductionChapter 7 CostTechnological relationship on supply side of market Inputs -Outputs Outputs varies with inputs-production theory (chapter 6)Inputs and relevant costs varies with outputs-cost theory (chapter 7)Chap
2、ter 6 Production (and Business Organization)1. Production Function and Basic Concepts1.1 The FunctionUsed to describe relationship between inputs and outputsQ = f ( X1, X2, X3, X4, . ) Maximum output, from any set of inputsShort run and long run Q=f( X1, X2, X3, X4, . ) , ALL factors variable Q = f
3、( X1, X2, X3, X4, . ) FIXED IN SR VARIABLE IN SR1.2 Some Particular Production FunctionsA function is homogeneous of degree-n, if multiplying all inputs by , increases the dependent variable bynQ = f ( K, L)So, f(K, L) = n QA Useful Specific function: Cobb-Douglas Production Q = A K L Cobb-Douglas P
4、roduction Functions are homogeneous of degree + Q = f ( K, L) for two input case1.3 Basic Product ConceptsAverage Product = Q / L output per labor, which is variableMarginal Product = Q/ L = dQ/dLoutput attributable to last unit of labor appliedTotal Product1.4 Time Horizon in Production Short run-a
5、 period that at least one input can change while at least another input do not have enough time to change.Long run-a period long enough for all inputs to change as producers please.The very long run-In addition to inputs, technology changes2. Short-Run Production: Law of Diminishing Return Marginal
6、ProductL 1 2 3 4 5Average ProductThink about average grade of whole the class and grade of new entrants. Alpha Beta Gama Delta EpsilonGrade 90 80 70 80 100Average 90 85 80 80 84LTotal OutputMarginal ProductLAverageProductInflection pointHow outputs changes with changes in one input?vWhen MP AP, then
7、 AP is RISINGIf your marginal grade in this class is higher than your average grade point average, then your G.P.A. Is risingvWhen MP AP, then AP is FALLINGIf the marginal weight added to a team is less than the average weight, then average team weight declinesvWhen MP = AP, then AP is at its MAXIf
8、the new hire is just as efficient as the average employee, then average productivity doesnt changeLaw of Diminishing ReturnsINCREASES IN ONE FACTOR OF PRODUCTION, HOLDING ONE OR OTHER FACTORS FIXED, AFTER SOME POINT, MARGINAL PRODUCT DIMINISHES. A SHORT RUN LAWpoint ofdiminishingreturnsVariable inpu
9、t MPBut also hold for long run when factor proportion changes3. Long Run Production: Returns to Scale3.1 Scale Changes and Returns to ScaleWe call it scale changes that all inputs change in about the same proportionReturns to scale refer to changes in output resulting from changes in all inputs3.2 T
10、hree Kinds of Returns to ScaleConstant Returns To Scale (CRS)doubling of all inputs doubles outputIncreasing Returns To Scale (IRS)doubling of all inputs MORE than doubles outputDecreasing Returns To Scale (DRS)doubling of all inputs DOESNT QUITE double output3.3 Cobb-Douglas Production Function and
11、 Returns to ScaleQ = A K L is a Cobb-Douglas Production FunctionIMPLIES:Can be IRS, DRS or CRS: vif + 1, then CRSvif + 1, then IRS3.4 Reason for Returns to ScaleIncreasing Return to Scale:vProduct-specific economies specialization learning curve effects.vPlant-specific economiesIndivisibility of Lum
12、py Equipment Economies in overheadEconomies in required reserves and investment (maintenance)economies of scope (interactions among products).vFirm-specific economies economies in distribution and transportation of a geographically dispersed firm, or economies in marketing, sales promotion, or R&D o
13、f multi-product firms.Decreasing Return to ScalevProblems of coordination and control as it is hard to send and receive information as the scale rises.vOther disadvantages of large size: slow decision ladderInflexibility3.5 Trend of Return to ScaleIRS first, and thenCRS, and DRS finally 4. The Very
14、Long Run: Technological ChangesTechnological changes alter production functionsGiven inputs can produce more outputs 2002 South-Western Publishing Chapter 7 Analysis of CostThe meaning and measurement of costShort-run Cost FunctionsLong-run Cost FunctionsLinks between Cost and ProductionScale Econom
15、ies and Cost1. Meaning of Cost in EconomicsThere Are Many Economic Cost Concepts1.1 Various Cost Conception Relevant to Economic CostOpportunity Cost - value of next best alternative use.Explicit vs. Implicit Cost - actual prices paid vs. opportunity cost of owner supplied resources. (Value of ones
16、own resources)Accounting CostActual paymentSunk Costs - already paid for, or there is already a contractual obligation to pay but cannot be recovered. It is irrelevant in decision making.Cost ItemActual Expenditure Value NowMeat and vegetables500500Kitchen appliances1000500Waitress hour10001000Decor
17、ation20000Utilities500500In sum50002500Own effort2000Service of family member1000Own house500TOTAL500060001.2 Understand Cost as an EconomistWhen do you start doing the business?When do you start doing the business?First, we do not consider opportunity costs ( the explicit costs are 5000 instead of
18、2500) Revenue: 4000？8000？9000？ or more?Second, we do not consider the difference between explicit costs and implicit costs (Suppose no implicit costs) : Revenue: 2000？3000？5500？or more? Third, when will you run the business if all cost considered Revenue: 3000？5500？6500？8000？9000？1.3 How economists
19、measure a variety of Costs?Depreciation Cost Measurement. Accounting depreciation (e.g., straight-line depreciation) tends to have little relationship to the actual loss of valueTo an economist, the actual loss of value is the true cost of using machinery. Inventory Valuation. Accounting valuation d
20、epends on its acquisition costEconomists view the cost of inventory as the cost of replacement. Unutilized Facilities. Empty space may appear to have no cost”Economists view its alternative use (e.g., rental value) as its opportunity cost.1.4 Measures of Profitability and DecisionAccountants and eco
21、nomists view profit differently. Accounting profit, at its simplest, is revenues minus explicit costs. Economists include other implicit costs (such as a normal profit on invested capital).Economic Profit = Total Revenues - Explicit Costs - Implicit Costs All Costs are understood as opportunity cost
22、Shoreham Power Plant in Long IslandCostRevenuecategoriesvalueSituation 1Situation 2Initial expenditure1.5 billion Sunk cost 1 billionIncremental cost if run it0.6 billion0.7 billion1.2 billion1972 Plan as of 1985Expectation of futureNew regulation; Rising price of materials; Growing demandPotential
23、RivalStay outsideEnterDuponts StrategyMaintain high priceDupont：100Rival：0Dupont ：60Rival ：40Price cutDupont ：50Rival ：0Dupont：50Rival ：-5Duponts Threat as a StrategyPotential RivalStay outsideEnterDuponts StrategyMaintain high priceDupont：100Rival：0Dupont ：10Rival ：40Price cutDupont ：50Rival ：0Dupo
24、nt：20Rival ：-5Examples of Sunk CostConduct a desperate fight (throw away the scabbard )Maos CourageBlind knightCourage of a man suffering incurable diseaseFootball ticket or movieWhat is the true cost of attending this course?Sell refrigerator 1.5 SummaryEconomic cost = explicit cost + implicit cost
25、Both explicit and implicit cost are measured by opportunity costSunk cost is excluded from economic costIn economic cost is included normal profit Normal profit is understood opportunity cost of running the business project or investment programThe lowest cost of different possibilities (a technical
26、 concept)2. Short Run Costs2.1 Various Short Run CostsTC = FC + VC fixed & variable costsATC = AFC + AVC = FC/Q + VC/QMC = C/ Q calculationcompositionTotalAverageMarginalFixedFCAFCNot availableVariableVCAVCMCAdditionTCATCMC2.2 Short Run Cost GraphsAFCQ1.Q2.AVCMC intersects lowest pointof AVC and low
27、est point ofATC.When MC AVC, AVC risesJust think about your grade in school3.QAFCAVCATCMC 2.3 Relation of Cost & Production Functions in SRThe reason for costs changes:Law of diminishing marginal returnAP & AVC are inversely related. (ex: one input)AVC = WL /Q = W/ (Q/L) = W/ APLAs APL rises, AVC fa
28、llsMP and MC are inversely related MC = TC/ Q=W L/Q =W/(Q/L) = W / MPLAs MPL declines, MC risesproduction functionsMPLAPcost functions MC AVC2.4 SummaryTC is increasing with output. It increases at a decreasing rate at first and then at a rising rate. It is greater than zero even at zero outputWith
29、output increasing, AC, AVC, and MC fall at first and then rise.Relationship between AC and MC: When MC AC, AC rises; when MC is equal to AC, AC reaches its lowest point.Relationship between AVC and MC: The same as that of AC and MC.Relationship bt. MC and TC: Falling MC corresponds to concave TC, im
30、plying that TC increases at at a smaller and smaller speed; increasing MC is consistent with convex TC, implying that TC rises at a increasing rate. 3. Long Run Costs3.1 Facts about LR CostsIn Long Run, ALL inputs are variableLR costs are also U-shapedLR cost curves are ENVELOPE of SR cost curvesLR
31、cost curve are FLATTER than SR cost curvesQLRAC LRMCSRAC1 SRMC1Long Run Cost Functions: Envelope of SRAC curvesQSRAC-small capitalSRAC-med. capitalSRAC-big capitalLRAC-Envelopeof SRAC curvesAve CostQ13.2 Why Economists think that the LRAC is U-shaped Law of Returns to ScaleDecreasing LRAC correspond
32、s to IRSIncreasing LRAC corresponds to DRSFlat LRAC corresponds to CRS4. Choice of Inputs by the Firm: Optimal Inputs CombinationGoal: Minimizing cost subject to given outputLeast Cost Rule:MPX/CX = MPY/CY. That is, the marginal product per dollar in each use is equal.Substitution rule:MPMPworker wo
33、rker MPMPcomputercomputerCan cost be reduced and how?Spending on laborSpending on capitalC CworkerworkerC Ccomputercomputer30/10=350/25=230/10=350/10=530/15=250/25=2Use of the Least Cost RuleIs the following firm EFFICIENT?Suppose that:MP L = 30MP K = 50W = 10 (cost of labor)R = 25 (cost of capital)Labor: 30/10 = 3Capital: 50/25 = 2A dollar spent on labor produces 3, and a dollar spent on capital produces 2.USE RELATIVELY MORE LABORIf spend $1 less in capital, output falls 2 units, but rises 3 units when spent on labor
