The Cost of Production

1
Chapter 7

• The Cost of Production
• ??

2
Topics

• 7.1 ?????
• 7.2 ????
• 7.3 ????
• 7.4 ???? vs. ????
• 7.5 ?????? ???(??)??
• 7.6 ??????? ????

3
??

• ??(??) ??????????.
• ????????, ????????????, ????????, ??????????
• ??????, ???????????. ??, ??????????

4
7.1 ???

• ???? ?????, ????
• ???? ?????
• ???? The value of the best alternative

5
???

• ??
• ????, ?????
• ??????

6
Measuring Cost Which Costs Matter?

• ???? (Sunk Cost)
• ????????
• ?????????????

7
Measuring Cost Which Costs Matter?

• ??
• ??????50?, ???????.
• ???? 500?, ?????550?.
• ?????? 525 ????, ???.
• ????????

8
Choosing the Locationfor a New Law School
Building

• ???????
• 1) ?????????
• 2) ??????? Evanston (????????) ???
• 3) ??????????

9
???????

• ??????????????
• ???? (Fixed Cost) ??????
• ???? (Variable Cost) ?????
• ???? (Sunk Cost) ????

10
Measuring CostWhich Costs Matter?

• PC ????????, ??/??
• ?? ???????? ??
• Pizza ????????

11
A Firms Short-Run Costs ()
Rate of Fixed Variable Total Marginal Average Ave
rage Average Output Cost Cost Cost Cost Fixed Var
iable Total ?? (FC) (VC) (TC) (MC) Cost Cost Cost
(AFC) (AVC) (ATC)

• 0 50 0 50 --- --- --- ---
• 1 50 50 100 50 50 50 100
• 2 50 78 128 28 25 39 64
• 3 50 98 148 20 16.7 32.7 49.3
• 4 50 112 162 14 12.5 28 40.5
• 5 50 130 180 18 10 26 36
• 6 50 150 200 20 8.3 25 33.3
• 7 50 175 225 25 7.1 25 32.1
• 8 50 204 254 29 6.3 25.5 31.8
• 9 50 242 292 38 5.6 26.9 32.4
• 10 50 300 350 58 5 30 35
• 11 50 385 435 85 4.5 35 39.5

12
7.2 ????

• ???? Marginal Cost (MC)
• ??? TCTFCTVC (???FC,VC)
• ???? AC (?ATC) AFCAVC

13
Cost in the Short Run

• TCTFCTVC
• MC?TC / ?Q ?TVC / ?Q ?wL/ ?Q
• ?w?? MC?wL / ?Qw ?L / ?Q

14
Cost in the Short Run

• ??
• ??, MP ?? ? MC ??
• ??? MC????, ?MP????

15
A Firms Short-Run Costs ()
Rate of Fixed Variable Total Marginal Average Ave
rage Average Output Cost Cost Cost Cost Fixed Var
iable Total (FC) (VC) (TC) (MC) Cost Cost Cost
(AFC) (AVC) (ATC)

• 0 50 0 50 --- --- --- ---
• 1 50 50 100 50 50 50 100
• 2 50 78 128 28 25 39 64
• 3 50 98 148 20 16.7 32.7 49.3
• 4 50 112 162 14 12.5 28 40.5
• 5 50 130 180 18 10 26 36
• 6 50 150 200 20 8.3 25 33.3
• 7 50 175 225 25 7.1 25 32.1
• 8 50 204 254 29 6.3 25.5 31.8
• 9 50 242 292 38 5.6 26.9 32.4
• 10 50 300 350 58 5 30 35
• 11 50 385 435 85 4.5 35 39.5

16
Cost Curves for a Firm
17
Cost Curves for a Firm
100
Cost ( per unit)
MC
75
50
ATC
AVC
25
AFC
Output (units/yr.)
1
0
2
3
4
5
6
7
8
9
10
11
18
Cost Curves for a Firm
TC
P

• A??? AVCMC

400
VC
300
200
A
100
FC
0
1
2
3
4
5
6
7
8
9
10
11
12
13
Output
19
Cost Curves for a Firm

• ???????
• 1) AFC ????
• 2) MC, AVC, ATC??????
• 3) MC?? AVC ? ATC ????
• 4) AVC???, ?ATC????, ??AFC

20
7.3 ????
????????

• ??????? ???? (??) (????)

21
Cost in the Long Run
The User Cost of Capital

• ??
• Delta ???? Boeing 737, ?? 1?5000?, ?? 30 ?
• ??? 1?5000?/30 500?
• ?? 10

22
Cost in the Long Run
The User Cost of Capital

• ???????? 500? (.10)(1?5000? ??)
• ???500? .1(1?5000?) 2000?
• ??? 500? .1(1??) 1500?

23
Cost in the Long Run
The User Cost of Capital

• ??????Rate per dollar of capital
• r ??? ??

24
Cost in the Long Run
The User Cost of Capital

• Airline Example
• Depreciation Rate 1/30 3.33/yr
• Rate of Return 10/yr
• User Cost of Capital
• r 3.33 10 13.33/yr

25
Cost in the Long Run
???????

• ??
• ??? ?? (L), ?? (K)
• ???? ??? (w)
• ???? R ??? ??

26
Cost in the Long Run
The User Cost of Capital
The Cost Minimizing Input Choice

• ??
• ?????, ???? r ??

27
Cost in the Long Run
The User Cost of Capital
The Cost Minimizing Input Choice

• ????
• C wL rK
• Isocost ????

28
Cost in the Long Run
The Isocost Line

• ??
• K C/r - (w/r)L
• ??
• ???????, ?????????

29
Choosing Inputs

• ???? (??????).
• ?? ???? ? ????

30
Producing a GivenOutput at Minimum Cost
Capital per year
???? C2 ??, Q1 ??? K2L2 ? K3L3 ?? ??????? K1L1.
Labor per year
31
Input Substitution When an Input Price Change
Capital per year
Labor per year
32
??????????

• ??
• B ???????????
• ??
• ??. ??, B??????????, ????????, ??????,
  ??????????

33
????

• ????, ????, ????

34
Cost in the Long Run

• ????????
• ?????????????
• ??
• If w 10, r 2, and MPL MPK, ????????? ????

35
The Effect of EffluentFees on Firms Input
Choices

• ?????????.
• ??? ???.
• ???????

36
The Cost-MinimizingResponse to an Effluent Fee
5,000
Capital (machine hours per month)
4,000
3,000
2,000
1,000
Waste Water (gal./month)
10,000
18,000
20,000
0
12,000
5,000
37
The Cost-MinimizingResponse to an Effluent Fee
5,000
Capital (machine hours per month)
4,000
3,000
2,000
1,000
Waste Water (gal./month)
0
10,000
18,000
20,000
12,000
38
The Effect of EffluentFees on Firms Input
Choices

• ??
• ??????, ??????????.
• ??????, ??????, ???????
• ? ?????????
• ??, ?????????

39
Cost in the Long Run

• ?????????
• ??? (expansion path) ??????????, ?????????????????

40
??? (Expansion Path)
Capital per year
150
100
75
50
25
Labor per year
100
150
300
200
50
41
?????? (????, TC, ?????)
Cost per Year
3000
2000
1000
Output, Units/yr
100
300
200
42
7.4 ?? vs. ?????

• ?????????? (??),???????? (??) ?, ?????

43
The Inflexibility ofShort-Run Production
Capital per year
Labor per year
44
Long-Run VersusShort-Run Cost Curves

• ?????? (LAC)
• ?????? Constant Returns to Scale
• LAC ???
• ??????Increasing Returns to Scale
• LAC ???
• ??????Decreasing Returns to Scale
• LAC ???

45
Long-Run VersusShort-Run Cost Curves

• ??????(LAC)
• LAC ???????? U ?.
• LMC (Long-run marginal cost) ?? LAC (long-run
  average cost)
• ? LMC lt LAC, LAC ??l
• ? LMC gt LAC, LAC ??
• LMC LAC ? LAC ???

46
Long-Run Averageand Marginal Cost
Cost ( per unit of output
Output
47
Long-Run VersusShort-Run Cost Curves

• ??
• LAC ???, LMC ? LAC ??????

48
Long-Run VersusShort-Run Cost Curves

• ??????????
• ????
• ???????????.
• ?????
• ???????????.

49
Long-Run VersusShort-Run Cost Curves

• ??????

50
Long-Run VersusShort-Run Cost Curves

• ??
• EC lt 1 MC lt AC
• ????
• EC 1 MC AC
• ?????????
• EC gt 1 MC gt AC
• ?????

51
Long-Run VersusShort-Run Cost Curves

• The Relationship Between Short-Run and Long-Run
  Cost
• We will use short and long-run cost to determine
  the optimal plant size

52
Long-Run Cost withConstant Returns to Scale
Cost ( per unit of output
Output
53
Long-Run Cost withConstant Returns to Scale

• ??
• ????, ???????? (Q1 ? SAC1).
• LAC ? SAC ????? (envelope curves).

54
Long-Run Cost with Economiesand Diseconomies of
Scale
Cost ( per unit of output
Output
55
??

1. LAC ????? SAC ????? ????
2. LMC ?? SMC ?????? ????

56
7.5 ????? (???? Economies of Scope)

• Examples
• Chicken farm?????
• Automobile company?????
• University?????
• ??
• ???(????????????????).

57
Production with TwoOutputs--Economies of Scope

• ??
• ?????????????
• ?????? (?????, product transformation curves) ???.

58
Product Transformation Curve
Number of tractors
Number of cars
59
Production with TwoOutputs--Economies of Scope

• ??
• PTC ???
• ?????????
• PTC ????, ????????
• ????????

60
Production with TwoOutputs--Economies of Scope

• ???????(The degree of economies of scope)
  ???????, ????
• C(Q1) ?? Q1 ??? C(Q2) ?? Q2 ???
• C(Q1Q2) ????Q1 Q2 ?????
• ? SC gt 0 ????
• ? SC lt 0 ?????

61
??????????

• ????
• ??
• SC 1.576 ??
• SC 0.104 ???
• ??
• ?????????????????
• ???????, ????????????

62
7.6 ??????????(Learning Curve)

• ???? (learning curve) ??????????.
• ????????, ????? (??)???

63
???? The Learning Curve
Hours of labor per machine lot
10
8
6
4
2
Cumulative number of machine lots produced
10
20
30
40
50
0
64
The Learning Curve
Hours of labor per machine lot

• The horizontal axis measures the cumulative
  number of hours of machine tools the firm has
  produced
• The vertical axis measures the number of hours of
  labor needed to produce each lot.

10
8
6
4
2
10
20
30
40
50
0
65
Dynamic Changes inCosts--The Learning Curve

• ??????????????

66
Dynamic Changes inCosts--The Learning Curve

• ? N1
• L A B, ??????????????
• ??????, ????????????????

67
Dynamic Changes inCosts--The Learning Curve

• L ?? A, A ???????.
• ??????

68
The Learning Curve
Hours of labor per machine lot
10
8
Doubling cumulative output causes a 20 reduction
in the difference between the input required
and minimum attainable input requirement.
6
4
2
Cumulative number of machine lots produced
10
20
30
40
50
0
69
Dynamic Changes inCosts--The Learning Curve

• ??
• 1) ????????????, ???????.
• 2) ???????????

70
Economies ofScale Versus Learning
Cost ( per unit of output)
Output
71
The Learning Curve in Practice

• ??????
• 37 ????
• ???????? 5.5
• ????, ??????11
• ??????, ?????? 27
• ?????? ????? ?????

72
The Learning Curve in Practice

• ????
• ???, 1974-1992 ??????? 20.
• ???? ??????40.

73
End of Chapter 7

• The Cost of Production