Output

1
Output
and Costs
2
Decision Time Frames

• Short Run
• period of time in which the amount of at least
  one input is fixed, and amounts of the other
  inputs can be varied
• Long Run
• period of time in which the amounts of all inputs
  can be varied

3
Definitions

• Total Product
• the total output produced
• Marginal Product
• the increased in the amount produced by adding
  one more of the input used (increase in total
  product divided by the increase in input)
• Average Product
• the average amount produced by each input used
• Diminishing Returns
• As more of a variable input is added, the
  resulting increase in output will eventually
  decrease

4
Total, Marginal, and Average Product
5
Total Product
TP
Pizzas
f

15
e
d
13
10
c
b
4
0
1
2
3
4
5
Labour
6
Marginal Product
MP
6
4
3
2
MP
0
1
2
3
4
5
Labour
7
Marginal Product
Output
TP
15
d
13
10
c
4
1
2
3
4
5
Labour
MP
6
4
3
2
MP
1
2
3
4
5
Labour
8
Average Product
AP, MP
6
c
Maximum AP
d
4.33
e
b
4
f
AP
2
MP
0
1
2
3
4
5
Labour
9
Short Run Costs

• Total Cost
• sum of the costs of all the inputs used
• Fixed Cost
• cost of a fixed input, does not change with
  output
• Variable Cost
• cost of a variable input, changes with output
• Marginal Cost
• the increase in the total cost by making one more
  thing

10
Total and Marginal Cost
11
Total Costs
Cost
150
100
50
0
5
10
15
Q
12
Average Cost

• Average fixed cost (AFC) is total fixed cost per
  unit of output.

Average variable cost (AVC) is total variable
cost per unit of output.
Average total cost (ATC) is total cost per unit
of output.
13
Marginal Cost and Average Costs
Cost
15
10
5
0
5
10
15
Output
14
Average Cost
OR
15
Costs
Total Total fixed variable
Total cost cost cost Labour
Output (workers (sweaters (TFC) (TVC)
(TC) per day) per day)
(dollars per day)
a 0 0 b 1 4 c 2 10 d 3 13 e 4 15 f
5 16
25 25 25 25 25 25
0 25 50 75 100 125
25 50 75 100 125 150
16
Exercise - Costs

• Graph the typical curves of the following
• Total fixed cost
• Total variable cost
• Total cost
• Graph the typical curves of the following
• Average fixed cost
• Average variable cost
• Average total cost
• Marginal cost

17

• TFC TVC TC
• AFC AVC ATC
• AFC TFC / Q produced
• AVC TVC / Q produced
• ATC TC / Q produced
• MC DTC / D Q produced
• MC D TVC / D Q produced
• MC equals ATC and AVC at their minimums
• If MC lt ATC (or AVC), then ATC (or AVC) is
  decreasing
• If MC gt ATC (or AVC), then ATC (or AVC) is
  increasing

18
Fill in the Missing Numbers
19
Fill in the Missing Numbers
20
6
AP
Average product and marginal product
4
PRODUCT CURVES AND COSTCURVES
MP
Falling MP and rising MC falling AP and rising
AVC
Falling MP and rising MC rising AP and falling
AVC
2
Rising MP and falling MC rising AP and falling
AVC
Labour
0 1.5 2.0
12
9
MC
Average product and marginal product
6
AVC
3
0 6.5 10
Pizzas
21
Shifts in the Cost Curves

• The position of a firms short-run cost curves
  depends on two factors
• technology
• prices of resources

22
Long-Run Cost

• Long-run cost is the cost of production when a
  firm uses the economically efficient quantities
  of labour and capital.

The behaviour of long-run cost depends on the
firms production function.
The production function is the relationship
between the maximum output attainable and the
quantities of both labour and capital.
23
The Production Function
Output (pizza per day) Labour 1
Oven 2 Oven 3 Oven 4 Oven

• 1 4 10 13 15
• 2 10 15 18 21
• 3 13 18 22 24
• 4 15 20 24 26
• 5 16 21 25 27

24
Average Costs per Pizza

• Pizzas 1 oven 2 ovens 3 ovens 4 ovens
• 4 12.50 15.00 20.67 26.67
• 10 7.50 7.50 9.42 11.67
• 13 7.69 6.92 7.69 9.36
• 15 8.33 6.67 7.33 8.33
• 16 9.38 6.77 7.19 8.07
• 20 --- 7.50 6.88 7.29
• 25 --- --- 8.00 7.50

25
Short-Run Costs of Four Different Plants
12.00 10.00 8.00 6.00
0 5 10
15 20 25
30
26
Long-Run Average Cost Curve
12.00 10.00 8.00 6.00
0 5 10
15 20 25
30
27
Returns to Scale

• Returns to scale are the increases in output that
  result from increasing all inputs by the same
  percentage.
• Three possibilities
• Constant returns to scale
• Increasing returns to scale
• Decreasing returns to scale

28
Economies of Scale
Output (pizza per day) Labour 1
Oven 2 Oven 3 Oven 4 Oven

• 1 4 10 13 15
• 2 10 15 18 21
• 3 13 18 22 24
• 4 15 20 24 26
• 5 16 21 25 27

Ovens 1 2 3
4 (number)
29
Long-Run Average Cost Curve
12.00 10.00 8.00 6.00
0 5 10
15 20 25
30
30
Short-Run Costs