Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)

7/25/2019 Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)

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Chapter 7 ECON4 William A.

McEachern

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+r#!&cti#n

and C#st

in the ,irm



22

C#st an! +r#)it

•

+r#!&cers- Ma(imie pr#)it• Opp#rt&nit" c#st

/ All res#&rces hae an #pp#rt&nit" c#st

• E(plicit c#sts / Opp#rt&nit" c#st #) res#&rces empl#"e!

$" a )irm

/ Cash pa"ments / On the acc#&nting statement

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C#st an! +r#)it

•

mplicit c#sts / A )irms #pp#rt&nit" c#st #) &sing its #'n

res#&rces #r th#se pr#i!e! $" its

#'ners / With#&t a c#rresp#n!ing cash pa"ment

/ N#t #n the acc#&nting statement




Alternatie Meas&res #) +r#)it

•

Acc#&nting pr#)it / 3#tal reen&e min&s e(plicit c#sts

• Ec#n#mic pr#)it

/ 3#tal reen&e min&s all c#sts implicit an!e(plicit• Opp#rt&nit" c#st #) all res#&rces

•N#rmal pr#)it / Acc#&nting pr#)it earne! 'hen all res#&rces

earn their #pp#rt&nit" c#st




E(hi$it 1

5

Wheeler 6ealer Acc#&nts% 2012




+r#!&cti#n in the h#rt R&n

•

8aria$le res#&rces / Can $e arie! in the sh#rt r&n t#

increase #r !ecrease pr#!&cti#n

•

,i(e! res#&rces / Cann#t $e arie! in the sh#rt r&n

• h#rt r&n

/ At least #ne res#&rce is )i(e!• L#ng r&n

/ N# res#&rce is )i(e!9© 2015 Cengage Learning. All Rights Resere!. Ma" n#t $e c#pie!% scanne!% #r !&plicate!% in 'h#le #r in part% e(cept )#r &se as

permitte! in a license !istri$&te! 'ith a certain pr#!&ct #r serice #r #ther'ise #n a pass'#r!*pr#tecte! 'e$site )#r classr##m &se.



6iminishing Marginal Ret&rns

•

3#tal pr#!&ct / A )irms t#tal #&tp&t

• +r#!&cti#n )&ncti#n

/ Relati#nship $et'een am#&nt #)res#&rces empl#"e! an! t#tal pr#!&ct

• Marginal pr#!&ct

/ Change in t#tal pr#!&ct )r#m ana!!iti#nal &nit #) res#&rce

/ Other things c#nstant




6iminishing Marginal Ret&rns

•

ncreasing marginal ret&rns / Marginal pr#!&ct increases

• 6iminishing marginal ret&rns

/ Marginal pr#!&ct !ecreases• La' #) !iminishing marginal ret&rns

/ As m#re #) a aria$le res#&rce is a!!e!

t# a gien am#&nt #) an#ther res#&rce / Marginal pr#!&ct eent&all" !eclines

• C#&l! $ec#me negatie

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E(hi$it 2

;

3he h#rt*R&n Relati#nship <et'een =nits #) La$#r an!3#ns #) ,&rnit&re M#e!

Marginal pr#!&ct increases as the )irm hires each #) the )irst three '#r>ers% re)lectingincreasing marginal ret&rns. 3hen marginal pr#!&ct !eclines% re)lecting !iminishingmarginal ret&rns. A!!ing m#re '#r>ers ma"% at s#me p#int% act&all" re!&ce t#talpr#!&ct as #cc&rs here 'ith an eighth '#r>er $eca&se '#r>ers start getting in each#thers 'a".




E(hi$it

10

3he 3#tal an! Marginal +r#!&ct #) La$#r

5

10

15

3 # t a l p r # ! & c

t

4 t # n s ? ! a " 5

5 10 W#r>ers per !a"0

5 10 W#r>ers per !a"

1

5

M a r g i n a l p r # ! & c t

4 t # n s ? ! a "

5

0

2

4

3#tal pr#!&ct

Marginal pr#!&ct

Negatie

marginal

ret&rns

6iminishing $&t

p#sitie

marginal ret&rns

ncreasing

Marginal

ret&rns

a 3#tal pr#!&ct

$ Marginal pr#!&ct

When marginal pr#!&ctis rising% t#tal pr#!&ctincreases $" increasingam#&nts. Whenmarginal pr#!&ct is)alling $&t still p#sitie%t#tal pr#!&ct increases$" !ecreasing am#&nts.

When marginal pr#!&cte@&als 0% t#tal pr#!&ct isat a ma(im&m. When

marginal pr#!&ct isnegatie% t#tal pr#!&ct is)alling.




C#sts in the h#rt R&n

•

,i(e! c#st% ,C / An" pr#!&cti#n c#st that is in!epen!ent

#) the )irms rate #) #&tp&t

•

8aria$le c#st% 8C / An" pr#!&cti#n c#st that changes as the

rate #) #&tp&t changes

•

3#tal c#st% 3C ,C B 8C





•

Marginal c#st% MC 3C?@ / Change in t#tal c#st res&lting )r#m a #ne*

&nit change in #&tp&t

•

Changes in MC / Re)lect changes in marginal pr#!&ctiit"

• ncreasing marginal ret&rns

/ MC )alls• 6iminishing marginal ret&rns

/ MC increases12© 2015 Cengage Learning. All Rights Resere!. Ma" n#t $e c#pie!% scanne!% #r !&plicate!% in 'h#le #r in part% e(cept )#r &se as

permitte! in a license !istri$&te! 'ith a certain pr#!&ct #r serice #r #ther'ise #n a pass'#r!*pr#tecte! 'e$site )#r classr##m &se.

E hi$it 4



E(hi$it 4

1

h#rt*R&n 3#tal an! Marginal C#st 6ata )#r m##ther M#er

<eca&se #) increasing marginal ret&rns )r#m the )irst three '#r>ers% marginal c#st!eclines at )irst% as sh#'n in c#l&mn 9. <eca&se #) !iminishing marginal ret&rns$eginning 'ith the )#&rth '#r>er% marginal c#st starts increasing.





•

,i(e! c#st c&re / traight h#ri#ntal line

• 8aria$le c#st c&re

/ tarts at the #rigin• 3#tal c#st c&re

/ ,i(e! c#st c&re B aria$le c#st c&re

• l#pe #) t#tal c#st c&re / Marginal c#st


E hi$it 5



E(hi$it 5

15

3#tal an! Marginal C#st C&res )#r m##ther M#er

200

D500

3 # t a l !

# l l a r s

25

C # s t p e r t #

n

D50 Marginal c#st

; 15 3#ns per !a"0 9 12

,i(e! c#st

3#tal c#st

3#ns per !a"0 ; 159 12

8aria$le c#st,i(e!

c#st

n panel a% )i(e! c#st is D200at all leels #) #&tp&t. 8aria$lec#st starts )r#m the #rigin an!increases sl#'l" at )irst as#&tp&t increases. When thearia$le res#&rce generates!iminishing marginal ret&rns%

aria$le c#st $egins t#increase m#re rapi!l". 3#talc#st is the ertical s&m #) )i(e!c#st an! aria$le c#st. n panel$% marginal c#st )irst !eclines%re)lecting increasing marginal

ret&rns )r#m the aria$leres#&rce la$#r in thise(ample an! then increases%re)lecting !iminishing marginalret&rns.




Aerage C#st in the h#rt R&n

•

Aerage aria$le c#st% A8C 8C?@ / 8aria$le c#st !ii!e! $" #&tp&t

• Aerage )i(e! c#st% A,C ,C?@

/ ,i(e! c#st !ii!e! $" @&antit"• Aerage t#tal c#st% A3C 3C?@

/ 3#tal c#st !ii!e! $" #&tp&t

/ A3C A,C B A8C




Aerage C#st in the h#rt R&n

•

When MC aerage c#st / 3he marginal p&lls !#'n the aerage

• When MC F aerage c#st

/ 3he marginal p&lls &p the aerage• =*shape #) aerage c#st c&res

/ La' #) !iminishing marginal ret&rns


E hi$it 9



E(hi$it 9

1:

h#rt*R&n 3#tal% Marginal% an! Aerage C#st6ata )#r m##ther M#er

Marginal c#st )irst )alls then increases $eca&se #) increasing then !iminishing marginalret&rns )r#m la$#r. As l#ng as marginal c#st is $el#' aerage c#st% aerage c#st!eclines. Once marginal c#st e(cee!s aerage c#st% aerage c#st increases. C#l&mns4% 5% an! 9 sh#' the relati#n $et'een marginal an! aerage c#sts.


E hi$it 7



E(hi$it 7

1;

Aerage an! Marginal C#st C&res )#r m##ther M#er

0 5 10 15 3#ns per !a"

D150

125

100

75

50

25

C # s t p e r t # n

A3C

A8C

MC

Aerage aria$le c#st an!aerage t#tal c#st c&res )irst!ecline% reach l#' p#ints% an!then rise. Oerall% the" hae =shapes. When marginal c#stis $el#' aerage aria$le

c#st% aerage aria$le c#st is)alling. When marginal c#ste@&als aerage aria$le c#st%aerage aria$le c#st is at itsminim&m. When marginal c#stis a$#e aerage aria$le

c#st% aerage aria$le c#st isincreasing. 3he samerelati#nship h#l!s $et'eenmarginal c#st an! aeraget#tal c#st.




C#sts in the L#ng R&n

•

L#ng r&n / +lanning h#ri#n

/ All res#&rces can $e arie!

•,irms plan )#r the l#ng r&n

• ,irms pr#!&ce in the sh#rt r&n





•

Ec#n#mies #) scale / ,#rces that re!&ce a )irms aerage c#st

/ As the scale #) #perati#n increases in the

l#ng r&n• 6isec#n#mies #) scale

/ ,#rces that ma" eent&all" increase a

)irms aerage c#st / As the scale #) #perati#n increases in the

l#ng r&n





•

L#ng*r&n aerage c#st c&re / n!icates the l#'est aerage c#st #)pr#!&cti#n•

At each rate #) #&tp&t 'hen the scale #) the)irm aries

/ +lanning c&re

/ =*shape!• Ec#n#mies #) scale

• 6isec#n#mies #) scale


E(hi$it :



E(hi$it :

2

h#rt*R&n Aerage 3#tal C#st C&res ,#rm the L#ng*R&n Aerage C#st C&re% #r +lanning C&re

C # s t p e r & n i t

0 @ @a @ O&tp&t per peri#!@$

M M

L

L

C&res % MM% an! LL sh#' sh#rt*r&n aerage t#tal c#sts )#r small% me!i&m% an! largeplants% respectiel". ,#r #&tp&t less than @a% aerage c#st is l#'est 'hen the plant is small.

<et'een @a an! @$% aerage c#st is l#'est 'ith a me!i&m*sie plant. ) #&tp&t e(cee!s @$%

the large plant #))ers the l#'est aerage c#st. 3he l#ng*r&n aerage*c#st c&re c#nnects

these l#' c#st segments #) each c&re an! is i!enti)ie! as a$L.

a b


E(hi$it ;



E(hi$it ;

24

Man" h#rt*R&n Aerage 3#tal C#st C&res ,#rm a ,irms

L#ng*R&n Aerage C#st C&re% #r +lanning C&re

A3C1

A3C2

0 @ @ O&tp&t per peri#!

C # s t p e r

& n i t

D11

10

;

b

A3C

A3C4

A3C5

A3C9

A3C7

A3C:

A3C;

A3C10

L#ng*r&n

aerage c#st

c

a

With man" p#ssi$le plant sies% the l#ng*r&n aerage c#st c&re is the enel#pe #) p#rti#ns #) thesh#rt*r&n aerage c#st c&res. Each sh#rt*r&n c&re is tangent t# the l#ng*r&n aerage c#stc&re. Each p#int #) tangenc" represents the least*c#st 'a" #) pr#!&cing that rate #) #&tp&t.





•

C#nstant l#ng*r&n aerage c#st / Oer s#me range #) #&tp&t

/ L#ng*r&n aerage c#st neither increases

n#r !ecreases 'ith changes in )irm sie / N# ec#n#mies #) scale

/ N# !isec#n#mies #) scale


E(hi$it 10



E(hi$it 10

29

A ,irms L#ng*R&n Aerage C#st C&re

C # s t p e r & n i t

0 A O&tp&t per peri#!<

Ec#n#mies

#) scale

L#ng*r&n

aerage c#st

6isec#n#mies

#) scale

C#nstant

aerage c#st

=p t# #&tp&t leel A% l#ng*r&n aerage c#st )alls as the )irm e(periences ec#n#mies #) scale.O&tp&t leel A is the minim&m e))icient scaleGthe l#'est rate #) #&tp&t at 'hich the )irmta>es )&ll a!antage #) ec#n#mies #) scale. <et'een A an! <% the aerage c#st is c#nstant.<e"#n! #&tp&t leel <% l#ng*r&n aerage c#st increases as the )irm e(periences

!isec#n#mies #) scale.© 2015 Cengage Learning. All Rights Resere!. Ma" n#t $e c#pie!% scanne!% #r !&plicate!% in 'h#le #r in part% e(cept )#r &se aspermitte! in a license !istri$&te! 'ith a certain pr#!&ct #r serice #r #ther'ise #n a pass'#r!*pr#tecte! 'e$site )#r classr##m &se.



Ec#n#mies H 6isec#n#mies #) cale

•

+lant leel / +artic&lar l#cati#n

• ,irm leel

/ C#llecti#n #) plants

27© 2015 Cengage Learning. All Rights Resere!. Ma" n#t $e c#pie!% scanne!% #r !&plicate!% in 'h#le #r in part% e(cept )#r &se as

Ch 07 Production and Cost in the Firm_MICRO ECON4 (1)

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