Kinh tế học vĩ mô - Chapter 9: Production and cost analysis I

Production and Cost Analysis IChapter 9IntroductionIn the supply process, people first offer the factors of production they control to the market.Then the factors are transformed by firms into goods that consumers want.Production occurs when factors of production (inputs) transform into goods and services.The Role of the FirmA firm is an economic institution that transforms factors of production into consumer goods and services.The Role of the FirmA firm:Organizes factors of production.Produces goods and services.Sells produced goods to individuals, businesses or government.The Firm and the MarketA firm operates within the market and, simultaneously, it abandons the market in the sense that it replaces the market with command and control.The Firm and the MarketHow an economy operates depends on transaction costs—costs of undertaking trades through the market.Firms Maximize ProfitFirm’s goal is to maximize profit.Profit is the difference between total revenue and total cost.Profit = Total revenue – Total costFirms Maximize ProfitAn accountant will calculate profit by subtracting explicit costs from the revenue.For an economist,the measure of profit is revenues minus both implicit and explicit costs.Firms Maximize ProfitImplicit costs include the opportunity costs of the factors of production.Economic profit = Revenue – (Implicit costs +Explicit costs)The Production Process The production process is generally divided into a long run planning decision and the short run adjustment decision.The Long Run and the Short RunA long-run decision is a decision in which the firm can choose the least expensive method of producing from among all possible production techniques.The Long Run and the Short RunA short-run decision is one in which the firm is constrained by past choices in regard to what production decisions it can make.The Long Run and the Short RunThe terms long run and short run do not necessarily refer to specific periods of time.They refer to the degree of flexibility the firm has in changing the level of output.The Long Run and the Short Run In the long run:By definition, the firm can vary the inputs as much as it wants.All inputs are variable.The Long Run and the Short Run In the short run:Flexibility is limited.Some factors of production cannot be changed.Generally, the production facility (“the plant”) is fixed in the short run.Production Tables and Production FunctionsHow a firm combines factors of production to produce consumer goods can be presented in a production table.A production table shows the output resulting from various combinations of factors of production or inputs.Production Tables and Production FunctionsMost of the production decisions firms make are short run decisions involving changes in output at a given production facility.The firm can increase or decrease production by adjusting the amount of variable inputs, such as labour or materials.Production Tables and Production FunctionsTotal product is the number of units of the good or service produced by a different number of workers.Production Tables and Production FunctionsMarginal product is the additional output that will result from an additional worker, other inputs remaining constant.Average product is calculated by dividing total output by the number of workers who produced it.Production Tables and Production FunctionsThe information in a production table is often summarized in a production function – a curve that describes the relationship between the inputs (factors of production) and outputs.Production Tables and Production FunctionsThe production function discloses the maximum amount of output that can be derived from a given number of inputs.A Production Table, Figure 9-1a, p 203Number of workers Total outputMarginal productAverage productIncreasing marginal productivity Diminishing marginal productivity Diminishing absolute productivity 4676531025123456789100455.75.85.65.24.64.03.32.5—41017232831323230250OutputDiminishing marginal productivityDiminishing absolute productivity32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 01234 56789 10Increasing marginal productivityNumber of workersTPOutput per worker123456789 10Number of workers7 6 5 4 3 2 1 0MPDiminishing marginal productivity Diminishing absolute productivity(a) Total product(b) Marginal and average productAPA Production Function, Figure 9-1b and c, p 203The Law of Diminishing Marginal ProductivityThe law of diminishing marginal productivity is an important element in all real-world production processes.Both marginal and average productivities initially increase, but eventually they both decrease.The Law of Diminishing Marginal ProductivityThis means that initially the production function exhibits increasing marginal productivity.Then it exhibits diminishing marginal productivity.Eventually, the production function exhibits negative marginal productivity.The Law of Diminishing Marginal ProductivityThe most important part of the production function is the part exhibiting diminishing marginal productivity and falling average product.The Law of Diminishing Marginal ProductivityThe law of diminishing marginal productivity states that as more and more of a variable input is added to an existing fixed input, after some point the additional output obtained from the additional input will fall.The Law of Diminishing Marginal ProductivityThis law is also called the flowerpot law, because it if did not hold true, the world’s entire food supply could be grown in a single flower pot.The Costs of ProductionCosts of production in the short run are:Fixed Costs, Variable Costs, and Total Costs.Fixed Costs, Variable Costs, and Total CostsFixed costs are those that are spent and cannot be changed in the period of time under consideration.In the long run there are no fixed costs since all costs are variable.Fixed Costs, Variable Costs, and Total CostsVariable costs are costs that change as output changes, such as the costs of labour and materials.Fixed Costs, Variable Costs, and Total CostsThe sum of the variable and fixed costs are total costs: TC = FC + VCThe Costs of ProductionBesides total costs, firms are concerned with their costs per unit of output.Per unit costs are Average Total Cost, Average Fixed Cost, and Average Variable CostAverage CostsAverage total cost (often called average cost) equals total cost divided by the quantity produced.ATC = TC/QAverage CostsAverage fixed cost equals fixed cost divided by quantity produced.AFC = FC/QAverage CostsAverage variable cost equals variable cost divided by quantity produced.AVC = VC/QAverage CostsSince total cost is the sum of fixed and variable costs, Average total cost is the sum of average fixed cost and average variable costATC = AFC + AVCMarginal CostMarginal cost is the change (increase) in total cost from a change (increase) in output by one unit.MC = TC/QThe cost of producing earrings, Table 9-1, p 205Graphing Cost CurvesTo gain a better understanding of the costs concepts, we can illustrate them by drawing a graph.Quantity is plotted on the horizontal axis and a dollar measure of various costs on the vertical axis.Total Cost CurvesThe total variable cost curve has the same shape as the total cost curve—increasing output increases variable cost.Total cost$400 350 300 250 200 150 100 50 0FC24M68102030Quantity of earringsVCTCLTotal Cost Curves, Fig. 9-2a, p 207OTC = (VC + FC)Average and Marginal Cost CurvesMarginal cost, average cost and average variable cost curves are U-shaped.The marginal cost curve will intersect the average total cost curve and the average variable cost curve at their minimum points.Average and Marginal Cost CurvesThe average fixed cost curve slopes down continuously.Downward-Sloping Shape of the Average Fixed Cost CurveThe average fixed cost curve looks like a child’s slide – it starts out with a steep decline, then it becomes flatter and flatter.It tells us that as output increases, the same fixed cost can be spread out over a wider range of output.The U Shape of the Average and Marginal Cost CurvesIn the short-run, output can only be increased by increasing the variable input.The U Shape of the Average and Marginal Cost CurvesAs more and more variable input is added to a fixed input, the law of diminishing marginal productivity sets in.Marginal and average productivities fall and marginal costs rise.The U Shape of the Average and Marginal Cost CurvesAnd when average productivity of the variable input falls, average variable costs rise.The U Shape of the Average and Marginal Cost CurvesThe average total cost curve is the vertical summation of the average fixed cost curve and the average variable cost curve, so it is always higher than both of them.The U Shape of the Average and Marginal Cost CurvesIf the firm increased output enormously, the average variable cost curve and the average total cost curve would almost meet.Cost$30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0Quantity of earrings246810121416182022 2426283032Per Unit Cost Curves, Figure 9-2b, p207AFCAVCATCMCThe Relationship Between Productivity and CostsThe shapes of the cost curves are mirror-image reflections of the shapes of the corresponding productivity curves.The Relationship Between Productivity and CostsWhen one is increasing, the other is decreasing.When one is at a maximum, the other is at a minimum.$18161412108642012 987654321021/24AVCMCOutputLabour AAPMPThe Relationship Between Productivity and Costs,Fig. 9-3, p20821Output per workerCosts per unita)b)Relationship Between Marginal and Average CostsThe marginal cost and average cost curves are related.When marginal cost exceeds average cost, average cost is rising.When marginal cost is less than average cost, average cost is falling.Relationship Between Marginal and Average CostsThis relationship explains why marginal cost curves always intersect average cost curves at the minimum of the average cost curve.Relationship Between Marginal and Average CostsThe position of the marginal cost relative to average total cost tells us whether average total cost is rising or falling.Relationship Between Marginal and Average CostsTo summarize:If MC ATC, then ATC is rising.Relationship Between Marginal and Average CostsMarginal and average total cost reflect a general relationship that also holds for marginal cost and average variable cost.If MC AVC, then AVC is rising.Relationship Between Marginal and Average CostsAverage total cost will fall when marginal cost is above average variable cost, so long as average variable cost does not rise by more than average fixed cost falls.Relationship Between Marginal and Average Costs,Fig 9-4, p209Costs per unit$9080706050403020100Quantity of outputArea B Area A Area C MCATCAVC123456789Q1BMCQ0AProduction and Cost Analysis IEnd of Chapter 9