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8/18/2019 06 Layton5e Ppt Edms
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KEY POINTS
• Costs and profit
• Economic and accounting profit
• Short run and ong run• Constructing a production function
• !"fining short#run and ong#run production costs
• Cost of "n$ironm"nta% s"nsiti$" s"r$ic"s
• E&paining and id"ntif%ing sca"s of production
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COSTS AN! PRO'IT
• Assumption( profit ma&imisation as th"
moti$ation for )usin"ss d"cisions*
• Profit ma&imisation goa has )""n sho+n
to )" a po+"rfu +a% of "&paining th"
)"ha$iour of manag"rs of firms +ho ar"
r"sponsi)" for ma,ing d"cisions a)outth" appropriat" "$" of output or pric"*
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ECONO-IC AN! ACCO.NTIN/
PRO'IT• Accounting profit on% ta,"s into consid"ration
"&picit costs 0 pa%m"nts to non#o+n"rs of a
firm for th"ir r"sourc"s1 "*g* +ag"s1 "as"pa%m"nts1 cost of mat"rias1 "tc*
• Economic profit incud"s "&picit costs and
impicit costs +hich ar" th" opportunit% costs1
"*g* +h"r" o+n"rs ha$" forgon" a saar%
"s"+h"r" to start th" firm*
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ACCO.NTIN/ PRO'IT 2ERS.S
ECONO-IC PRO'ITAccounting Proft is:
Total Revenue – Total Explicit
Costs
Economic Proft is: Total Revenue – Total
Opportunity Costs
Total Opportunity Cost is:Explicit Costs + Implicit Costs
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ACCO.NTIN/ PRO'IT 2ERS.S
ECONO-IC PRO'IT E3A-P4E
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NOR-A4 PRO'IT
• Th" minimum profit n"c"ssar% to ,""p a firm in
op"ration*
• A firm that "arns norma profit "arns totar"$"nu" "5ua to its tota opportunit% costs*
So it still makes an accountingproft
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SHORT R.N 2ERS.S 4ON/ R.N
• Cost th"or% is th" r"ationship )"t+""n output
and costs*
• Economists distinguish )"t+""n th" short#runand th" ong#run*
• a period o time !ere t!ereis at least one fxed input
S!ort"
run• a su#cient period o time to
allo all inputs to $e varied%ong"run
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&'
'I3E! AN! 2ARIA4E INP.TS
• any resource !ere t!e(uantity used cannotc!ange during a specifc
period o time
) fxed
input is*• any resource or !ic!
t!e (uantity used can
c!ange during a specifcperiod o time
)varia$leinput is*
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&&
THE PRO!.CTION '.NCTION
• t!e maximum amounts ooutput a frm can produceand various (uantities o
inputs
T!erelations
!ip$eteen*
• s!os !o output rises$ased on num$er opeople employed
) typicalproductio
nunction*
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THE SHORT#R.N PRO!.CTION
'.NCTION
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THE SHORT#R.N PRO!.CTION
'.NCTION• E&hi)it 6*7 sho+s(
0 th" $aria)" input as th" num)"r of
"mpo%""s "mpo%"d p"r da%1 and "ach"mpo%"" is pr"sum"d to ha$" "5ua 8o)
s,is*
0 th" amount of and1 th" num)"r of $in"s1 th"
num)"r of machin"s and a oth"r inputs asfi&"d inputs*
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-AR/INA4 PRO!.CT
• R"ca from Chapt"r 91 "conomists +or,
on th" margins(• +" m"asur" th" chang" in tota output produc"d )%
adding on" unit of a $aria)" input1 +ith a oth"r
inputs us"d )"ing h"d constant :r"inforcing ceteris
paribus;
• it is a short#run conc"pt*
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-AR/INA4 PRO!.CT C.R2E
T!e la o diminis!ing returns explainst!e s!ape o t!e marginal product
curve
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THE 4A< O' !I-INISHIN/
RET.RNS• "%ond som" point1 th" margina product
d"cr"as"s as additiona units of a
$aria)" factor ar" add"d to a fi&"dfactor*
• O$"ra producti$it% :output p"r +or,"r;
starts to fas aft"r a c"rtain num)"r ofadditiona inputs*
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SHORT#R.N COST 'OR-.4AS
• In th" short run1 th" )usin"ss ma,"s
d"cisions )as"d upon th" cost of
producing $arious "$"s of output*
• Economists distinguish )"t+""n tota
costs and a$"rag" costs*
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TOTA4 COST C.R2ES
TotalixedCosts
,o not varyas outputvaries andmust $e
paid even
i output is-ero
Total.aria$leCosts
)re -ero!en
output is-ero andvary as
outputvaries
TotalCost
Is t!e sumo total
fxed costand totalvaria$le
cost ateac! levelo output
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SHORT#R.N COSTS C.R2ES(
TOTA4 COST C.R2ES
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A2ERA/E COST C.R2ES
)veragefxed cost
)veragevaria$le
cost
)veragetotal cost
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-AR/INA4 COST
• -argina ana%sis as,s ho+ much it costs
to produc" an additiona unit of output
• It is th" chang" in tota cost +h"n on"
additiona unit of output is produc"d
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SHORT#R.N COSTS C.R2ES(
A2ERA/E AN! -AR/INA4 COSTS
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-AR/INA4 COST RE4ATIONSHIPS(
THE -AR/INA40A2ERA/E R.4E
• AC alls/!en MC 0
AC
• AC rises/!en MC 1
AC
• AC is at its minimumpoint
/!en MC 2 AC
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-C AN! -P IN2ERSE4Y RE4ATE!
• Rising portion of th" MP cur$" corr"sponds to th"
d"cining portion of th" MP cur$" and $ic" $"rsa*
• -a&imum point of th" MP cur$" corr"sponds to th"
minimum point of th" MC cur$"*
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4ON/#R.N PRO!.CTION COSTS
• In th" ong run1 th" 5uantit% of a inputs
can )" ad8ust"d(
0 )uid a arg"r factor% 0 "&pand onto n"+ and
0 hir" n"+ staff*
• Th" ong#run ao+s gr"at"r panning forth" "&p"ct"d "$" of production*
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4ON/#R.N A2ERA/E COST
C.R2ETh" cur$" trac"s
th" o+"st cost p"r
unit at +hich a firm
can produc" an%"$" of output +h"n
th" firm is in a
position to )uid an%
d"sir"d pant si="*
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!I''ERENT SCA4ES O'
PRO!.CTION%R)C is 3"s!aped
Economieso scale%R)C curve
declines as t!efrm increases
output
Constantreturns to
scale%R)C curve is
!ori-ontal ast!e frmincreases
output
,iseconomies o scale
%R)C curverises as t!e frm
increases
output
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!I''ERENT SCA4ES O'
PRO!.CTION
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SCA4ES O' PRO!.CTION
Economies o scale
•
/!en %R)C declines as t!e frmincreases output4• /!en*
• t!e division o la$our and t!e use o
specialisation are increased• more e#cient use o capital e(uipment4
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SCA4ES O' PRO!.CTION
Constant returns to scale
• /!en %R)C does not c!ange as t!efrm increases output4
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SCA4ES O' PRO!.CTION
,iseconomies o scale
•
/!en t!e %R)C rises as t!e frmincreases output4• /!en t!ere*• is a $ureaucracy•
is an increased $arrier tocommunication• are management di#culties 5lack o
coordination64