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CH 4 Theory Prodn & Cost

1. The document discusses production functions and costs, including short-run and long-run production costs. It describes stages of production and how average, total, and marginal costs change with different levels of output. 2. Key concepts covered include fixed and variable costs, economies and diseconomies of scale, and the relationship between marginal product, average product, and labor. Graphs and tables are presented to illustrate these stages and costs of production. 3. Different sizes of plants and long-run average cost curves are compared, showing how long-run average cost initially decreases but eventually increases again due to diseconomies of scale.

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Muhammad Adib
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45 views15 pages

CH 4 Theory Prodn & Cost

1. The document discusses production functions and costs, including short-run and long-run production costs. It describes stages of production and how average, total, and marginal costs change with different levels of output. 2. Key concepts covered include fixed and variable costs, economies and diseconomies of scale, and the relationship between marginal product, average product, and labor. Graphs and tables are presented to illustrate these stages and costs of production. 3. Different sizes of plants and long-run average cost curves are compared, showing how long-run average cost initially decreases but eventually increases again due to diseconomies of scale.

Uploaded by

Muhammad Adib
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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CHAPTER 4 : THEORY OF PRODN & COSTS

1. COSTS & PROFIT econ vs acc profit 2. SR PRODN COST a) SR prodn function b) LDMR c) SR costs 3. LR PRODN COST a) diff scales of prodn b) LRAC c) Econ & Disecon of scales

PRODUCERS OBJ
Obj Immediate goals i) max sales rev ii) conquer largest mkt share LR goal get profit How? Convert buyers become regular users, will repeat purchase hence continues rev Cut down cost, will increase profit

PRODUCERS RESPONSIBILITIES
i) Consumers - offer fair prices ie mkt P (not manipulated) - provide save & Q products - info given must carry the truthful claims ii) Society - allocates resources efficiently can min cost - not produce harmful goods - overcome unemployment problem fair wages - giving out charity, scholarships, welfare iii) Environment - clean & free from pollution (environmental friendly)

ACCOUNTING VS ECONOMIC
= TR TC Acc = TR total explicit cost Eco = TR OC = TR (explicit + implicit cost) Explicit (FC + VC) payments to non owners of a firm for their resources Value of resources purchased for prodn What ever expenses occurred in order to produce g&s Have to pay to factor of prodn eg : w, raw materials, transport, rent Implicit Value of self own, self employed resources utilized in prodn What is owned by producer The OC of using resources owned by firm eg : IR on loan, foregone salary

PRODUCTION FUNCTIONS
Q = f (Land, L, K, Entrepreneur) Function i) SR = at least 1 input fixed, others vary Q = f (L, K) ii) LR = all factors vary Q = f (L, K) - large prodn, low cost - specialization, bulk purchases In LR all inputs can be expanded, so scale & size of the firm increase Firm plan how to min AC Choose combination of input that can min cost In LR, cost of prodn is min compare to SR

PRODUCTION FUNCTIONS
Concept i) TC = FC + VC ii) AC = (TC / Q) = AFC + AVC = (FC / Q) + (VC / Q) iii) Average Product per L (APL) = (Q /L) - average product that can be produced by each L iv) Marginal Product of L (MPL) = (Q / L) - additional product that can be produced by hiring one more L

LDMR vs RTS
LDMR After a certain point, when the additional units of variable input are added to fixed input, the marginal product of variable input decrease eg : when L is added to fix K, additional product (MPL) will begin to RTS As firm expand its size or scale of prodn, AC and finally

STAGES OF PRODUCTION
Q 0 1 2 3 4 5 6 7 8 9 FC VC TC 1,000 1,050 1,090 1,130 1,160 1,210 1,300 1,440 1,630 1,970 AFC AVC AC MC

STAGES OF PRODUCTION
SATEGS OF PRODUCTION 1,200

1,000

II

III

800 COST AFC 600 AVC AC MC 400

200

0 1 2 3 4 5 Q 6 7 8 9

STAGES OF PRODUCTION
Stages I Start from 0 end at AVC intersect with MC (at min point AVC) AFC & AVC rapidly Increasing return due to cost Stage II Start from AVC intersect with MC end at MC intersect with AC (at min point AC) AFC rapidly & AVC begin to slowly AFC > AVC AC but less than stage I Stage III AFC nearly flat AVC due to diminishing returns to variable factor AFC < AVC make AC

STAGES OF PRODUCTION
L 0 1 2 3 4 5 6 7 8 K 3 3 3 3 3 3 3 3 3 Q 0 10 25 45 60 70 75 75 70 APL MPL

STAGES OF PRODUCTION
Stages of Production

80 70 60 50 40 30 20 10 0 -10

Q, APL, MPL

II

III

Q APL MPL

4 L

STAGES OF PRODUCTION
Stages I Sharp of Q ie each additional inL will result greater of Q Increasing return to scale Start from 0 (MPL > APL) end at MPL = APL Stage II Start from MPL = APL (then APL > MPL) end at MPL = 0 Value of MPL & APL Q reach its max points Increasing rate is slower than stage I (constant RTS) Stage III Start from MPL = 0 Stop producing at this stage coz when L , Q Decreasing RTS

LRAC
Assumption 3 different size of plants / machine ie Q1, Q2 & Q3 Each Q has min AC LRAC tangent with SRAC
COST SRAC1 SRAC2 SRAC3 LRAC

Q1 SCALE ECO

Q2

Q3 DISSCALE ECO

ECON VS DISECON OF SCALE


Expansion of firm SE cost saving DE AC Caused by internal and external factor


Economies of Scale Diseconomies of Scale L diseconomies Input problems Technological problems Mgmt problems

L Specialization Mktg economies Technical economies Managerial economies Financial economies

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