Microeconomics - COST AND PRODUCTION
Microeconomics - COST AND PRODUCTION ECON 22060-007
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This 9 page Bundle was uploaded by Julia kelley on Monday October 19, 2015. The Bundle belongs to ECON 22060-007 at Kent State University taught by Curtis Reynolds (P) in Spring 2015. Since its upload, it has received 40 views. For similar materials see Principles of Economics: Microeconomics in Economcs at Kent State University.
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Date Created: 10/19/15
Microeconomics Production and Costs Production Question Objectives 1 What type of inputs does the firm use 2 What type of costs does the firm face 3 What kind of industry is it and how much market power does the firm have a how much control do they have over the price that they charge 4 What type of time frame are we thinking about Profits Profits Total Revenue TR Total Costs Inputs any resources used by the firm during its production The way that inputs are combined together is often referred to as a production function or production technology Inputs create costs Variable inputs inputs that may be varied in the short run as quantity produced is changed Short run 0 Ex Labor L if you want to produce more at your firm you need to hire more workers Fixed inputs inputs that are fixed in the short run ie they cannot be changed as quantity changes Long term 0 Ex Capital K the physical assets of a firm factories office space or warehouses rented for the year large machinery Physical vs financial capital This capital refers to physical capital of the firm not financial capital Financial capital is stock issues bonds and debt Financial capital is used to purchase physical capital Financial capital is a way to purchase an input in the production process it is not itself an input ShortRun is the amount of time in which some inputs are fixed Longrun is when no inputs are fixed or all inputs are variable 0 Example I Long run is like decision about whether to go to a movie 0 Care about both the ticket price and the opportunity cost of your time 0 Can choose whether or not to participate ie Whether or not you will spend the time and money or not I Short run is like the decision about whether to sit through the movie 0 Once you have paid the ticket price is sunk The only relevant cost is the opportunity cost Short Run Production Some inputs are fixed 0 Suppose that the fixed input is capital K I Therefore the only way for the firm to adjust the quantity 2 produced in the shortrun is by changing the variable inputs 0 Suppose that the fixed variable input is labor L I either the number of workers or the amount of hours worked What Happens to Labor as Quantity is increased As labor increases quantity increases 0 Does not increase at constant rate I Average product of labor APL 0 Average productivity of workers 0 EXAMPLE If the APL 3 each worker produces 3 units on average I Marginal product of labor MPL o The additional output that a firm gets by hiring additional workers 0 the MPL is the productivity of each worker 0 EXAMPLE IF MPL 4 then the last worker hired increased the output of the firm by 4 units Quantity Changed MPL Labor Changed What happens to APL and MPL as L increases As labor increases more both APL and MPL will eventually fall The decrease in MPL is called diminishing returns to labor 0 This will always eventually happen as labor increases and while other inputs are held at FIXED I will happen in the short run Labor Quantity APL MPL 1 1 1 1 2 2 1 05 4 3 075 175 6 4 066 383 MPL on the graph The MPL increases for a while Because hiring more workers allows for Specialization o Specialization is assigning workers to different tasks within the firm Eventually the firm will experience diminishing returns 0 Each additional worker still increases output but not as much I Workers do not lower the firms output lt gt lt gt Specialization Diminishing returns MPL RELATIONSHIP BETWEEN APL and MPL MPL intersects APL at the maximum of APL When MPL gt APL APL increases 0 Each additional worker is more productive than the average so the average is increasing When MPL lt APLAPL is decreasing 0 Each additional worker is less productive than the average so the average is decreasing APL is increasing when MPL gt APL APL is decreasing because MPL lt APL APL Overview of Production Firms want to maximize profits Firms must hire inputs to produce their output Hiring more inputs in the shortrun while other inputs are fixed will eventually lead to diminishing returns 0 Hiring inputs creates costs COST Types of Cost 1 Variable costs a Associates with variable costs b Varies as Quantity changes 2 Fixed costs a Fixed in shortrun b Does not vary with Q c even if firm does nothing costs still exists 3 Total costs a Add up all costs Example finding costs Q TC Fixed Cost Variable Cost 1 20 20 0 2 30 20 10 3 36 20 16 4 Average Costs how much each unit costs on average a Total cost b Fixed cost ATC FC c Variable cost Example of finding average costs Q TC Fixed Cost Variable Cost ATC AFC AVC 0 20 20 0 0 0 0 1 30 20 10 30 20 10 1 36 20 16 362 202 162 18 10 8 On the graph As quantity increases total costs and variable costs increase remember fixed costs are fixed As quantity increases ATC and AVC fall and then rise 0 AFC always falls Marginal Cost Interested in how much an extra unit would cost the cost of change change of TC or VC or FC MC Change of Q Example Q TC Fixed Cost Variable Cost ATC AFC AVC MC 0 20 20 0 0 0 0 0 1 30 20 10 30 20 10 30 20 10 36 20 16 362 202 162 6 18 10 8 cost between TC1 and TC2 Marginal cost trends I Falls and then rises very fast COST of FIRM Determined by productivity of inputs If you want to increase Q you must increase L labor Variable cost is VC wL Wage does not change as we change quantity 0 Marginal cost is the inverse of marginal productivity Marginal production marginal cost WHAT HAPPENS IF WAGES INCREASE MC increases MC wMPL VC increase VC wL TC increase because VC have increased FC do not change 0 So all of the curves shift up WHAT HAPPENED IS FIXED COSTS INCREASE TC increase because FC have increased Nothing happens to VC or MC 0 So ATC shift up 0 le the difference between ATC and AVC increases as AFC increase Long Run Costs and the Scale of Operations In the short run you have fixed costs so the only way to increase production was to increase labor LRATC long run average total cost curve 0 Will always choose scale of operation that has lowest average cost 39 Firm will choose cheapest option IRTS Increasing returns to Scale 0 Increasing gains from the size of your firm 39 Actually lowers average cost On graph I RTS ATC CONSTANT RETURNS TO SCALE IRTS CRTS DECREASING RETURNS TO SCALE 0 BAD Decreasing returns to scale increasing costs I RTS CRTS DRTS
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