1 / 29

Chapter 8

Chapter 8. The Meaning of Costs. Opportunity costs Measuring a firm’s opportunity costs factors not owned by the firm: explicit costs factors already owned by the firm: implicit costs irrelevance of historic costs and replacement costs. Production in the Short run. Production functions

jamuna
Download Presentation

Chapter 8

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 8

  2. The Meaning of Costs • Opportunity costs • Measuring a firm’s opportunity costs • factors not owned by the firm: explicit costs • factors already owned by the firm: implicit costs • irrelevance of historic costs and replacement costs

  3. Production in the Short run • Production functions • Long-run and short-run production: • fixed and variable factors • The law of diminishing returns • The short-run production function: • total physical product (TPP)

  4. Wheat production per year from a particular farm Number of workers 0 1 2 3 4 5 6 7 8 TPP 0 3 10 24 36 40 42 42 40 Tonnes of wheat produced per year Number of farm workers

  5. Wheat production per year from a particular farm TPP Tonnes of wheat produced per year Number of farm workers

  6. Wheat production per year from a particular farm TPP Diminishing returns set in here Tonnes of wheat produced per year b a Number of farm workers

  7. Wheat production per year from a particular farm d TPP Maximum output Tonnes of wheat produced per year b a Number of farm workers

  8. Production in the Short run • Production functions • Long-run and short-run production: • fixed and variable factors • The law of diminishing returns • The short-run production function: • total physical product (TPP) • average physical product (APP)

  9. Production in the Short run • Production functions • Long-run and short-run production: • fixed and variable factors • The law of diminishing returns • The short-run production function: • total physical product (TPP) • average physical product (APP) • marginal physical product (MPP)

  10. Production in the Short run • Production functions • Long-run and short-run production: • fixed and variable factors • The law of diminishing returns • The short-run production function: • total physical product (TPP) • average physical product (APP) • marginal physical product (MPP) • the graphical relationship between TPP, APP and MPP

  11. Wheat production per year from a particular farm TPP Tonnes of wheat per year DTPP = 7 Number of farm workers (L) DL = 1 MPP = DTPP / DL = 7 Tonnes of wheat per year Number of farm workers (L)

  12. Wheat production per year from a particular farm TPP Tonnes of wheat per year Number of farm workers (L) Tonnes of wheat per year Number of farm workers (L) MPP

  13. Wheat production per year from a particular farm TPP Tonnes of wheat per year Number of farm workers (L) APP = TPP / L Tonnes of wheat per year APP Number of farm workers (L) MPP

  14. Wheat production per year from a particular farm TPP Tonnes of wheat per year b Diminishing returns set in here Number of farm workers (L) b Tonnes of wheat per year APP Number of farm workers (L) MPP

  15. Wheat production per year from a particular farm d TPP Maximum output Tonnes of wheat per year b Number of farm workers (L) b Tonnes of wheat per year APP d Number of farm workers (L) MPP

  16. Wheat production per year from a particular farm d c Slope = TPP / L = APP TPP Tonnes of wheat per year b Number of farm workers (L) b c Tonnes of wheat per year APP d Number of farm workers (L) MPP

  17. Costs in the Short run • Costs and inputs • costs and the productivity of factors • costs and the price of factors • Fixed costs and variable costs • Total costs • total fixed cost (TFC) • total variable cost (TVC) • total cost (TC = TFC + TVC)

  18. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (£) 12 12 12 12 12 12 12 12 TFC

  19. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TVC (£) 0 10 16 21 28 40 60 91 TFC (£) 12 12 12 12 12 12 12 12 TVC TFC

  20. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TVC (£) 0 10 16 21 28 40 60 91 TC (£) 12 22 28 33 40 52 72 103 TFC (£) 12 12 12 12 12 12 12 12 TC TVC TFC

  21. Total costs for firm X TC TVC Diminishing marginal returns set in here TFC

  22. Costs in the Short run • Marginal cost • marginal cost (MC) and the law of diminishing returns • the relationship between the marginal and total cost curves

  23. Marginal cost MC Costs (£) x Output (Q)

  24. Costs in the Short run • Marginal cost • marginal cost (MC) and the law of diminishing returns • the relationship between the marginal and total cost curves • Average cost • average fixed cost (AFC) • average variable cost (AVC) • average (total) cost (AC)

  25. Costs in the Short run • Marginal cost • marginal cost (MC) and the law of diminishing returns • the relationship between the marginal and total cost curves • Average cost • average fixed cost (AFC) • average variable cost (AVC) • average (total) cost (AC) • Relationship between average and marginal cost

  26. Average and marginal costs MC Costs (£) x Output (Q)

  27. Average and marginal costs MC AVC Costs (£) y x Output (Q)

  28. Average and marginal costs MC AVC Costs (£) y x AFC Output (Q)

  29. Average and marginal costs MC AC AVC Costs (£) z y x AFC Output (Q)

More Related