Slide Set 4: Production & Cost

Transcription

1 Economics 1 Overview of Microeconomic Theory Slide Set 4: Production & Cost Observations Assumptions Utility Max Budget constraint Cost min. Profit max. Decisions Model-> "tool" Consumer Behavior Individ. Demand Firm Behavior supply decisions Equilibrium Aggregation of decisions Demand Supply University of North Carolina Chapel Hill Structure Interaction of Supply and Demand Outline Next 2 Lectures: Production, Inputs, and Cost Modeling Production: The Technological Constraint Terms and Concepts: Short & Long run Total, Average, & Marginal Products "Law" of Diminishing Marginal Returns Deriving Cost Functions Terms and Concepts: Total, Average, & Marginal Costs Short & Long run Outline Next 2 Lectures: Production, Inputs, and Cost Working toward market supply: The Theory of the firm Objective: make money (profits) by choosing how much to make and how to make it. Constraint 1: laws of physics, engineering and biology Constraint 2: must get owners to "voluntarily" sell it resources. Has to buy its inputs on the market Constraint 3: must sell the output Econ 1 (4) Prduction-Costs_p.PRZ 1-4 1/21/5

2 The "Production Function" and Product Curves The "technology" places limits on our ability to convert one kind of "stuff" into another. We use the concept of a "production function" to describe this relationship. You tell my the bundle of inputs I can use in production, and I'll tell you the maximum amount of the output I can produce. The "Production Function" and Product Curves Looking at how the total output changes when we change the quantity of one homogeneous input at a time we can define Total Physical Product (TPP): Average Physical Product (APP): Marginal Physical Product (MPP): Production in the "Long Run" and in the "Short Run" Graphs of TPP, APP, & MPP and how they are related Long run: Short run: Corn (bags) Chicken TTP.. Marginal Average Pounds of Chicken per Week Total, Average & Marginal Product Curves Total Marg. Ave Bags of Corn Per Week Econ 1 (4) Prduction-Costs_p.PRZ 5-8 1/21/5

3 The Law of Diminishing Marginal Returns An increase in the amount of any one input, holding the amounts of all other inputs constant, ultimately leads to lower marginal returns (product) of the expanding input. Cost Curve Definitions Total Cost: Total expenditure required to produce Q, TC(Q) = FC +TVC Total Variable Cost: Total expenditure on variable input required to produce Q, TVC(Q) Fixed Cost: Cost of input that does not (cannot) change in quantity as output changes, FC Average Variable Cost: TVC(Q)/Q Average Total Cost: TC(Q)/Q Average Fixed Cost: FC/Q Marginal Cost: "Change" in total cost when one more unit is produced. MC(Q)=DTC(Q)/DQ Graphs of TPP, APP, & MPP and how they are related Short Run Total Cost FC + P IQ I Corn (bags) Chicken TTP.. Mariginal Prod Average Prod Pounds of Chicken per Week Total, Average & Marginal Product Curves Total Marg. Ave. Chicken Total Cost x3 + 5 = Cost ($) Short Run Total Cost Bags of Corn Per Week FC= $5 Price of Corn is $1 per bag Chicken Econ 1 (4) Prduction-Costs_p.PRZ /21/5

4 Chicken AFC MC AVC ATC TC $.36 $.71 $.71 $ $.14 $.45 $.56 $ $.8 $.33 $.45 $ Cost Curves Cost Curves AFC SRMC AVC ATC Relationships between Product Curves and Cost Curves If only one input is variable MC = (Price of input)/mpp AVC = (Price of input)/app 1. $.5 $.29 $.4 $ $.4 $.33 $.38 $ $.3 $.38 $.38 $ $.3 $.53 $.4 $ Cost ($) $.3 $1.11 $.43 $ $.3 $7.14 $.49 $ Lbs. of Chicken per week Long Run Cost Consideration Cost Curves: Long Run Total, Average, & Marginal cost. Input Choice with multiple inputs. Pi/MPPi = Pj/MPPj Scale Economies: (Shape of LRAC) Average Fixed Cost Definition: AFC = FC/Q Average Fixed cost of 36 lbs. $ Constant Returns $ Increasing Returns $ Decreasing Returns FC =$ 5, Q = 36 AFC(36) = $5/36lbs = $.139 per lb. Econ 1 (4) Prduction-Costs_p.PRZ /21/5

5 Marginal Cost Definition: MC = DTC/DQ MC at 36: TC(36)=$25 TC(14)=$15 TC = $1, Q = 22 MC(36) = $1/22 lbs = $.45 per lb. = P Corn /MPP Corn Average Variable and Total Cost Definition: AVC = TVC/Q ATC=TC/Q At Q=36: it take 2 bags of corn TVC= $1 per bag x 2 bags =$2 TC = TVC + FC = $25 AVC(36) = $2/36 = $.56 per lb. ATC(36) = ($2 + $5)/36 = $.69 per lb. Econ 1 (4) Prduction-Costs_p.PRZ /21/5