平狄克微觀經(jīng)濟(jì)學(xué)第七章課件TheCostofProduction.ppt

1、Chapter 7The Cost of Production1Chapter 1Topics to be DiscussedMeasuring Cost: Which Costs Matter?Cost in the Short RunCost in the Long RunLong-Run Versus Short-Run Cost Curves2Chapter 1Topics to be DiscussedProduction with Two Outputs-Economies of ScopeDynamic Changes in Costs-The Learning CurveEst

2、imating and Predicting Cost3Chapter 1IntroductionThe production technology measures the relationship between input and output.Given the production technology, managers must choose how to produce.4Chapter 1IntroductionTo determine the optimal level of output and the input combinations, we must conver

3、t from the unit measurements of the production technology to dollar measurements or costs.5Chapter 1Measuring Cost:Which Costs Matter?Accounting CostActual expenses plus depreciation charges for capital equipmentEconomic CostCost to a firm of utilizing economic resources in production, including opp

4、ortunity costEconomic Cost vs. Accounting Cost6Chapter 1Opportunity cost.Cost associated with opportunities that are foregone when a firms resources are not put to their highest-value use.Measuring Cost:Which Costs Matter?7Chapter 1An ExampleA firm owns its own building and pays no rent for office s

5、paceDoes this mean the cost of office space is zero?Measuring Cost:Which Costs Matter?8Chapter 1Sunk CostExpenditure that has been made and cannot be recoveredShould not influence a firms decisions.Measuring Cost:Which Costs Matter?9Chapter 1An ExampleA firm pays $500,000 for an option to buy a buil

6、ding.The cost of the building is $5 million or a total of $5.5 million.The firm finds another building for $5.25 million.Which building should the firm buy?Measuring Cost:Which Costs Matter?10Chapter 1Choosing the Locationfor a New Law School BuildingNorthwestern University Law School1) Current loca

7、tion in downtown Chicago2) Alternative location in Evanston with the main campus11Chapter 1Northwestern University Law School3) Choosing a SiteLand owned in ChicagoMust purchase land in EvanstonChicago location might appear cheaper without considering the opportunity cost of the downtown land (i.e.

8、what it could be sold for)Choosing the Locationfor a New Law School Building12Chapter 1Northwestern University Law School3) Choosing a SiteChicago location chosen-very costly Justified only if there is some intrinsic values associated with being in ChicagoIf not, it was an inefficient decision if it

9、 was based on the assumption that the downtown land was “free”Choosing the Locationfor a New Law School Building13Chapter 1Total output is a function of variable inputs and fixed inputs. Therefore, the total cost of production equals the fixed cost (the cost of the fixed inputs) plus the variable co

10、st (the cost of the variable inputs), orMeasuring Cost:Which Costs Matter?Fixed and Variable Costs14Chapter 1Fixed CostDoes not vary with the level of outputVariable Cost Cost that varies as output variesMeasuring Cost:Which Costs Matter?Fixed and Variable Costs15Chapter 1Fixed CostCost paid by a fi

11、rm that is in business regardless of the level of outputSunk Cost Cost that have been incurred and cannot be recoveredMeasuring Cost:Which Costs Matter?16Chapter 1Personal Computers: most costs are variable Components, laborSoftware: most costs are sunkCost of developing the softwareMeasuring Cost:W

12、hich Costs Matter?17Chapter 1PizzaLargest cost component is fixedMeasuring Cost:Which Costs Matter?18Chapter 1A Firms Short-Run Costs ($)050 050-150501005050501002507812828253964350981482016.732.749.34501121621412.52840.555013018018102636650150200208.32533.3750175225257.12532.1850204254296.325.531.8

13、950242292385.626.932.4105030035058530351150385435854.53539.5Rate ofFixedVariableTotalMarginalAverageAverageAverageOutputCostCostCostCostFixedVariableTotal(FC)(VC)(TC)(MC)CostCostCost(AFC)(AVC)(ATC)19Chapter 1Cost in the Short RunMarginal Cost (MC) is the cost of expanding output by one unit. Since f

14、ixed cost have no impact on marginal cost, it can be written as:20Chapter 1Cost in the Short RunAverage Total Cost (ATC) is the cost per unit of output, or average fixed cost (AFC) plus average variable cost (AVC). This can be written:21Chapter 1Cost in the Short RunAverage Total Cost (ATC) is the c

15、ost per unit of output, or average fixed cost (AFC) plus average variable cost (AVC). This can be written:22Chapter 1Cost in the Short RunThe Determinants of Short-Run CostThe relationship between the production function and cost can be exemplified by either increasing returns and cost or decreasing

16、 returns and cost.23Chapter 1Cost in the Short RunThe Determinants of Short-Run CostIncreasing returns and costWith increasing returns, output is increasing relative to input and variable cost and total cost will fall relative to output.Decreasing returns and costWith decreasing returns, output is d

17、ecreasing relative to input and variable cost and total cost will rise relative to output.24Chapter 1Cost in the Short RunFor Example: Assume the wage rate (w) is fixed relative to the number of workers hired. Then:25Chapter 1Cost in the Short RunContinuing:26Chapter 1Cost in the Short RunContinuing

18、:27Chapter 1Cost in the Short RunIn conclusion:and a low marginal product (MP) leads to a high marginal cost (MC) and vise versa.28Chapter 1Cost in the Short RunConsequently (from the table):MC decreases initially with increasing returns 0 through 4 units of outputMC increases with decreasing return

19、s5 through 11 units of output29Chapter 1A Firms Short-Run Costs ($)050 050-150501005050501002507812828253964350981482016.732.749.34501121621412.52840.555013018018102636650150200208.32533.3750175225257.12532.1850204254296.325.531.8950242292385.626.932.4105030035058530351150385435854.53539.5Rate ofFix

20、edVariableTotalMarginalAverageAverageAverageOutputCostCostCostCostFixedVariableTotal(FC)(VC)(TC)(MC)CostCostCost(AFC)(AVC)(ATC)30Chapter 1Cost Curves for a FirmOutputCost($ peryear)100200300400012345678910111213VCVariable costincreases with production andthe rate varies withincreasing &decreasing re

21、turns.TCTotal costis the verticalsum of FC and VC.FC50Fixed cost does notvary with output31Chapter 1Cost Curves for a FirmOutput (units/yr.)Cost($ perunit)25507510001234567891011MCATCAVCAFC32Chapter 1Cost Curves for a FirmThe line drawn from the origin to the tangent of the variable cost curve:Its s

22、lope equals AVCThe slope of a point on VC equals MCTherefore, MC = AVC at 7 units of output (point A)OutputP100200300400012345678910111213FCVCATC33Chapter 1Cost Curves for a FirmUnit CostsAFC falls continuouslyWhen MC AVC or MC AVC or MC ATC, AVC & ATC increaseOutput (units/yr.)Cost($ perunit)255075

23、10001234567891011MCATCAVCAFC34Chapter 1Cost Curves for a FirmUnit CostsMC = AVC and ATC at minimum AVC and ATCMinimum AVC occurs at a lower output than minimum ATC due to FCOutput (units/yr.)Cost($ perunit)25507510001234567891011MCATCAVCAFC35Chapter 1Operating Costs for Aluminum Smelting ($/Ton - ba

24、sed on an output of 600 tons/day)Variable costs that are constant at all output levelsElectricity$316Alumina369Other raw materials125Plant power and fuel10 Subtotal$82036Chapter 1Operating Costs for Aluminum Smelting ($/Ton - based on an output of 600 tons/day)Variable costs that increase when outpu

25、t exceeds 600 tons/dayLabor$150Maintenance120Freight50 Subtotal$320Total operating costs$114037Chapter 1The Short-Run VariableCosts of Aluminum SmeltingOutput (tons/day) Cost($ per ton)1100120013003006009001140MCAVC38Chapter 1Cost in the Long RunUser Cost of Capital = Economic Depreciation + (Intere

26、st Rate)(Value of Capital)The User Cost of Capital39Chapter 1Cost in the Long RunExampleDelta buys a Boeing 737 for $150 million with an expected life of 30 yearsAnnual economic depreciation = $150 million/30 = $5 millionInterest rate = 10%The User Cost of Capital40Chapter 1Cost in the Long RunExamp

27、leUser Cost of Capital = $5 million + (.10)($150 million depreciation)Year 1 = $5 million + (.10)($150 million) = $20 millionYear 10 = $5 million + (.10)($100 million) = $15 millionThe User Cost of Capital41Chapter 1Cost in the Long RunRate per dollar of capitalr = Depreciation Rate + Interest RateT

28、he User Cost of Capital42Chapter 1Cost in the Long RunAirline ExampleDepreciation Rate = 1/30 = 3.33/yrRate of Return = 10%/yrUser Cost of Capitalr = 3.33 + 10 = 13.33%/yrThe User Cost of Capital43Chapter 1Cost in the Long RunAssumptionsTwo Inputs: Labor (L) & capital (K)Price of labor: wage rate (w

29、)The price of capitalR = depreciation rate + interest rateThe Cost Minimizing Input Choice44Chapter 1Cost in the Long RunQuestionIf capital was rented, would it change the value of r ?The User Cost of CapitalThe Cost Minimizing Input Choice45Chapter 1Cost in the Long RunThe Isocost LineC = wL + rKIs

30、ocost: A line showing all combinations of L & K that can be purchased for the same costThe User Cost of CapitalThe Cost Minimizing Input Choice46Chapter 1Cost in the Long RunRewriting C as linear:K = C/r - (w/r)LSlope of the isocost: is the ratio of the wage rate to rental cost of capital.This shows

31、 the rate at which capital can be substituted for labor with no change in cost.The Isocost Line47Chapter 1Choosing Inputs We will address how to minimize cost for a given level of output.We will do so by combining isocosts with isoquants48Chapter 1Producing a GivenOutput at Minimum CostLabor per yea

32、rCapitalperyearIsocost C2 shows quantity Q1 can be produced withcombination K2L2 or K3L3.However, both of theseare higher cost combinationsthan K1L1.Q1Q1 is an isoquantfor output Q1.Isocost curve C0 showsall combinations of K and Lthat can produce Q1 at thiscost level.C0C1C2CO C1 C2 arethreeisocost

33、linesAK1L1K3L3K2L249Chapter 1Input Substitution When an Input Price ChangeC2This yields a new combinationof K and L to produce Q1.Combination B is used in placeof combination A.The new combination represents the higher cost of labor relativeto capital and therefore capital is substituted for labor.K

34、2L2BC1K1L1AQ1If the price of laborchanges, the isocost curvebecomes steeper due to the change in the slope -(w/L).Labor per yearCapitalperyear50Chapter 1Cost in the Long RunIsoquants and Isocosts and the Production Function51Chapter 1Cost in the Long RunThe minimum cost combination can then be writt

35、en as:Minimum cost for a given output will occur when each dollar of input added to the production process will add an equivalent amount of output.52Chapter 1Cost in the Long RunQuestionIf w = $10, r = $2, and MPL = MPK, which input would the producer use more of? Why?53Chapter 1The Effect of Efflue

36、ntFees on Firms Input ChoicesFirms that have a by-product to production produce an effluent.An effluent fee is a per-unit fee that firms must pay for the effluent that they emit.How would a producer respond to an effluent fee on production?54Chapter 1The Scenario: Steel Producer1)Located on a river:

37、 Low cost transportation and emission disposal (effluent).2) EPA imposes a per unit effluent fee to reduce the environmentally harmful effluent.The Effect of EffluentFees on Firms Input Choices55Chapter 1The Scenario: Steel Producer3)How should the firm respond?The Effect of EffluentFees on Firms In

38、put Choices56Chapter 1The Cost-MinimizingResponse to an Effluent FeeWaste Water(gal./month)Capital(machine hours permonth)Output of 2,000Tons of Steel per MonthA10,00018,00020,000012,000Slope of isocost = -10/40 = -0.252,0001,0004,0003,0005,0005,00057Chapter 1The Cost-MinimizingResponse to an Efflue

39、nt FeeOutput of 2,000Tons of Steel per Month2,0001,0004,0003,0005,00010,00018,00020,000012,000Capital(machine hours permonth)E5,0003,500Slope of isocost = -20/40= -0.50BFollowing the impositionof the effluent fee of $10/gallonthe slope of the isocost changeswhich the higher cost of water tocapital s

40、o now combination B is selected.APrior to regulation the firm chooses to produce an output using 10,000 gallons of water and 2,000machine-hours of capital at A.CFWaste Water(gal./month)58Chapter 1Observations:The more easily factors can be substituted, the more effective the fee is in reducing the e

41、ffluent.The greater the degree of substitutes, the less the firm will have to pay (for example: $50,000 with combination B instead of $100,000 with combination A)The Effect of EffluentFees on Firms Input Choices59Chapter 1Cost minimization with Varying Output LevelsA firms expansion path shows the m

42、inimum cost combinations of labor and capital at each level of output.Cost in the Long Run60Chapter 1A Firms Expansion PathLabor per yearCapitalperyearExpansion PathThe expansion path illustratesthe least-cost combinations oflabor and capital that can be used to produce each level ofoutput in the lo

43、ng-run.25507510015010050150300200A$2000Isocost Line200 UnitIsoquantB$3000 Isocost Line300 Unit IsoquantC61Chapter 1A Firms Long-Run Total Cost CurveOutput, Units/yrCostperYearExpansion Path100010030020020003000DEF62Chapter 1Long-Run VersusShort-Run Cost CurvesWhat happens to average costs when both

44、inputs are variable (long run) versus only having one input that is variable (short run)?63Chapter 1Long-RunExpansion PathThe long-run expansionpath is drawn as before.The Inflexibility ofShort-Run ProductionLabor per yearCapitalperyearL2Q2K2DCFEQ1ABL1K1L3PShort-RunExpansion Path64Chapter 1Long-Run

45、Average Cost (LAC)Constant Returns to ScaleIf input is doubled, output will double and average cost is constant at all levels of output.Long-Run VersusShort-Run Cost Curves65Chapter 1Long-Run Average Cost (LAC)Increasing Returns to ScaleIf input is doubled, output will more than double and average c

46、ost decreases at all levels of output.Long-Run VersusShort-Run Cost Curves66Chapter 1Long-Run Average Cost (LAC)Decreasing Returns to ScaleIf input is doubled, the increase in output is less than twice as large and average cost increases with output.Long-Run VersusShort-Run Cost Curves67Chapter 1Lon

47、g-Run Average Cost (LAC)In the long-run:Firms experience increasing and decreasing returns to scale and therefore long-run average cost is “U” shaped.Long-Run VersusShort-Run Cost Curves68Chapter 1Long-Run Average Cost (LAC)Long-run marginal cost leads long-run average cost:If LMC LAC, LAC will rise

48、Therefore, LMC = LAC at the minimum of LACLong-Run VersusShort-Run Cost Curves69Chapter 1Long-Run Averageand Marginal CostOutputCost($ per unitof outputLACLMCA70Chapter 1QuestionWhat is the relationship between long-run average cost and long-run marginal cost when long-run average cost is constant?L

49、ong-Run VersusShort-Run Cost Curves71Chapter 1Economies and Diseconomies of ScaleEconomies of ScaleIncrease in output is greater than the increase in inputs.Diseconomies of ScaleIncrease in output is less than the increase in inputs.Long-Run VersusShort-Run Cost Curves72Chapter 1Measuring Economies

50、of ScaleLong-Run VersusShort-Run Cost Curves73Chapter 1Measuring Economies of ScaleLong-Run VersusShort-Run Cost Curves74Chapter 1Therefore, the following is true:EC 1: MC 1: MC ACAverage cost indicate increasing diseconomies of scaleLong-Run VersusShort-Run Cost Curves75Chapter 1The Relationship Be

51、tween Short-Run and Long-Run CostWe will use short and long-run cost to determine the optimal plant sizeLong-Run VersusShort-Run Cost Curves76Chapter 1Long-Run Cost withConstant Returns to ScaleOutputCost($ per unitof outputQ3SAC3SMC3Q2SAC2SMC2LAC =LMCWith many plant sizes with SAC = $10the LAC = LM

52、C and is a straight lineQ1SAC1SMC177Chapter 1ObservationThe optimal plant size will depend on the anticipated output (e.g. Q1 choose SAC1,etc).The long-run average cost curve is the envelope of the firms short-run average cost curves.QuestionWhat would happen to average cost if an output level other

53、 than that shown is chosen?Long-Run Cost withConstant Returns to Scale78Chapter 1Long-Run Cost with Economiesand Diseconomies of ScaleOutputCost($ per unitof outputSMC1SAC1SAC2SMC2LMC If the output is Q1 a managerwould chose the small plantSAC1 and SAC $8.Point B is on the LAC because it is a least

54、cost plant for a given output.$10Q1$8BALAC SAC3SMC379Chapter 1What is the firms long-run cost curve?Firms can change scale to change output in the long-run.The long-run cost curve is the dark blue portion of the SAC curve which represents the minimum cost for any level of output.Long-Run Cost withCo

55、nstant Returns to Scale80Chapter 1ObservationsThe LAC does not include the minimum points of small and large size plants? Why not?LMC is not the envelope of the short-run marginal cost. Why not?Long-Run Cost withConstant Returns to Scale81Chapter 1Production with TwoOutputs-Economies of ScopeExample

56、s:Chicken farm-poultry and eggsAutomobile company-cars and trucksUniversity-Teaching and research82Chapter 1Economies of scope exist when the joint output of a single firm is greater than the output that could be achieved by two different firms each producing a single output.What are the advantages

57、of joint production?Consider an automobile company producing cars and tractorsProduction with TwoOutputs-Economies of Scope83Chapter 1Advantages1)Both use capital and labor.2)The firms share management resources.3)Both use the same labor skills and type of machinery.Production with TwoOutputs-Econom

58、ies of Scope84Chapter 1Production:Firms must choose how much of each to produce.The alternative quantities can be illustrated using product transformation curves.Production with TwoOutputs-Economies of Scope85Chapter 1Product Transformation CurveNumber of carsNumberof tractorsO2O1 illustrates a low

59、levelof output. O2 illustratesa higher level of output withtwo times as much labor and capital.O1Each curve showscombinations of output with a given combination of L & K.86Chapter 1ObservationsProduct transformation curves are negatively slopedConstant returns exist in this exampleSince the producti

60、on transformation curve is concave is joint production desirable?Production with TwoOutputs-Economies of Scope87Chapter 1ObservationsThere is no direct relationship between economies of scope and economies of scale.May experience economies of scope and diseconomies of scaleMay have economies of scal