Kinh tế học vĩ mô - Chapter 10: Production and cost analysis II

Production and Cost Analysis IIChapter 10Making Long-Run Production DecisionsTo make their long-run decisions, firms look at costs of various inputs and the various production technologies available for combining these inputs, and then decide which combination offers the lowest cost.Technical Efficiency and Economic EfficiencyTechnical efficiency means that the fewest possible inputs are used to produce a given output.Technical efficiency is efficiency that does not consider costs of production.Technical Efficiency and Economic EfficiencyThe economically efficient method of production is the method that produces a given level of output at the lowest possible cost.Determinants of the Shape of the Long-Run Cost CurveThe law of diminishing marginal productivity does not hold in the long run since all inputs are variable.Determinants of the Shape of the Long-Run Cost CurveThe shape of the long-run cost curve results from the existence of economies and diseconomies of scale.Economies of ScaleThere are economies of scale in production when the long run average cost decreases as output increases.Economies of scale (increasing returns to scale) are cost savings associated with larger scale of production.Economies of ScaleAn indivisible setup cost is the cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible to use.Economies of ScaleIndivisible setup costs are the source of many real-world economies of scale.Economies of ScaleEconomies of scale occur whenever inputs do not need to be increased in proportion to the increase in output.As output increases, cost per unit falls in the long run, so this can also be seen as an increase in productivity.Economies of ScaleDoubling the inputs more than doubles the output, when there are economies of scale.Firms can economize on management cost, or they can take advantage of specialized labour and specialized capital.A Typical Long-Run Average Total Cost Table, Fig. 10-1a, p 217QuantityTotal Costs of LaborTotal Cost of MachinesTotal Costs = TCL + TCMAverage Total Costs = TC/Q11121314151617181920$381390402420450480510549600666$254260268280300320340366400444$6356506707007508008509151,0001,110$58545250505050515356Long run average total cost$64 62 60 58 56 54 52 50 4811121314151617181920QuantityMinimum efficient scale of productionA Typical Long-Run Average Total Cost Curve, Fig. 10-1b, p 217Economiesof scaleConstant returns to scaleDiseconomiesof scaleCosts per unitEconomies of ScaleThe minimum efficient scale of production is the amount of production that spreads setup costs out sufficiently for firms to undertake production profitably.Economies of ScaleThe minimum efficient scale of production will be at the beginning of the constant returns portion of the average cost curve—where average total costs are at a minimum.Economies of ScaleThe implication of economies of scale is that in some industries firms must be of a certain size to be able to compete successfully.Diseconomies of ScaleDiseconomies of scale or decreasing returns to scale refer to the increasing long run average costs as output increases.Diseconomies of ScaleDiseconomies occur for a number of reasons as the firm increases its sizeCoordination of a large firm is more difficultInformation costs and communication costs increase as firm increasesMonitoring costs increaseTeam spirit may decreaseConstant Returns to ScaleConstant returns to scale (CRTS) occur where long-run average total costs do not change as output increases.It is shown by the flat portion of the long run average total cost curve.Summary of Returns to Scale,Table 10-1, p 219Returns to scaleDoubling inputs results in:Slope of the LRACIncreasing returns to scale (IRTS; economies of scale)Output more than doubles.downwardConstant returns to scale (CRTS)Output exactly doubles.horizontalDecreasing returns to scale (DRTS; diseconomies of scale)Output less than doubles.upwardImportance of Economies and Diseconomies of ScaleEconomies and diseconomies of scale play important roles in real-world long-run production decisions.Importance of Economies and Diseconomies of ScaleThe long-run and the short-run average cost curves have the same U-shape, but the underlying causes of these shapes differ.Importance of Economies and Diseconomies of ScaleEconomies and diseconomies of scale account for the shape of the long-run total cost curve.Importance of Economies and Diseconomies of ScaleThe assumption of initially increasing and then eventually diminishing marginal productivity (as a variable input is added to a fixed input) accounts for the shape of the short-run cost curve.The Envelope RelationshipIn the long run all inputs are variable, while in the short run some inputs are fixed.As a result, long-run cost will always be less than or equal to short-run cost.0QuantitySRAC2SRAC3SRAC4LRACSRAC1SRMC1SRMC2SRMC3SRMC4Q2Q3Envelope of Short-Run Average Total Cost Curves,Fig.10-2, p 220Q1Costs per unitEntrepreneurial Activity and the Supply DecisionTo move from cost to supply, entrepreneurial initiative is required.An entrepreneur is an individual who sees an opportunity to sell an item at a price higher than the average cost of producing it.Entrepreneurial Activity and the Supply DecisionThe entrepreneur is the organizer of production.Entrepreneur visualizes the demand and convinces the individuals who own the factors of production that they want to produce that good.Entrepreneurial Activity and the Supply DecisionThe greater the difference between price and average total cost, the greater the entrepreneur’s incentive to tackle the organizational problems and supply the good.Using Cost Analysis in the Real WorldSome of the problems of using cost analysis in the real world include the following:Economies of scopeLearning by doing and technological changeMany dimensionsUnmeasured costsEconomies of ScopeThere are economies of scope in production when the costs of producing products are interdependent so that it is less costly for a firm to produce one good when it is already producing another.Economies of ScopeEconomies of scope play an important role in firms’ decisions of what combination of goods to produce.Economies of ScopeGlobalization, by allowing firms to segment the production process, has made economies of scope even more important to firms in their production decisions.Learning by Doing and Technological ChangeProduction techniques available to real-world firms are constantly changing because of learning by doing and technological change.These changes occur over time and cannot be accurately predicted.Learning by Doing and Technological ChangeLearning by doing means that as we do something, we learn what works and what doesn’t, and over time we become more proficient at it.Learning by Doing and Technological ChangeThe concept of learning by doing emphasizes the importance of the past effort in developing cost advantages.Learning by Doing and Technological ChangeExternal economies are present in all industries – those are the external forces at work which are capable of reducing costs for all firms belonging to the industryLearning by Doing and Technological ChangeTechnological change is an increase in the range of production techniques that provides new ways of producing goods.Learning by Doing and Technological ChangeTechnological change offers an increase in the known range of production.Learning by Doing and Technological ChangeWhenever learning by doing or technological change occurs, the cost curve shifts down since the same output can be produced at a lower cost.Learning by Doing and Technological ChangeIn some industries such as the computer business, technological change is occurring so fast that it overwhelms all other cost components.Many DimensionsMost decisions that firms make involve more than one dimension.The only dimension in the standard model is the level of output.Good economic decisions take all relevant marginal costs and benefits into account.Unmeasured Opportunity CostsThe relevant costs as defined by economists are not the costs found in a firm’s books.Economists include opportunity costs while accountants use explicit costs that can be measured.Production and Cost Analysis IIEnd of Chapter 10