Cost of Production

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Transcript of Cost of Production

ASISTENSI PE130 Oktober 2007

Saran dan Kritik

Kalo ada pertanyaan yang aneh gak usah dijawab sekalian soalnya bikin bingung. (terlalu baik kalo ngejawab jd pertanyaan nggak penting itu tetep dijawab dan bikin agak bingung). Slidenya pake bahasa indonesia ajah Perbanyak contoh soal dan pembahasannya (memberikan contoh soal UTS dan UAS) mahasiswa mengerjakan terlebih dahulu soal-soalnya . Ada hiburannya musik (humornya ditambah supaya nggak ngantuk) Terlalu cepet ngejelasinnya (kak lebih pelan-pelan ngejelasinnya yah, saya ngertinya lama..hehe) Kakak jangan suka bingung sendiri ya kak (kebanyakan yang dipikirin tidak perlu memikirkan asumsi yang merestriksi kakak berstatement ) jawabanya tergantung mulu Lebih santai tetapi serius ( jangan terlalu serius). Jangan terlalu kaku Jangan terlalu lama efisiensi waktu Intonasi nadanya diperjelas Belajar dari hal-hal yang belum dimengerti Lebih sistematis Ada sesi pertanyaan ketika asistensi akan berakhir

Cost of production

Measuring Cost: Which Costs Matter?Economic Cost vs. Accounting Cost Accounting CostActual expenses plus depreciation charges for capital equipment

Economic CostCost to a firm of utilizing economic resources in production, including opportunity cost

Opportunity cost.Cost associated with opportunities that are foregone when a firm s resources are not put to their highest-value use.

Costs as Opportunity Costs A firm s cost of production includes all the

opportunity costs of making its output of goods and services. Explicit and Implicit CostsA firm s cost of production include explicit costs and implicit costs. Explicit costs are input costs that require a direct outlay of money by the firm. Implicit costs are input costs that do not require an outlay of money by the firm.

Economic Profit versus Accounting Profit Economists measure a firm s economic profit as

total revenue minus total cost, including both explicit and implicit costs. Accountants measure the accounting profit as the firm s total revenue minus only the firm s explicit costs. When total revenue exceeds both explicit and implicit costs, the firm earns economic profit.Economic profit is smaller than accounting profit.

Economic versus Accountants

How an Economist Views a Firm

How an Accountant Views a Firm

Economic profit Accounting profit Implicit costs Total opportunity costs

Revenue

Revenue

Explicit costs

Explicit costs

The Short Run versus the Long Run

Short-run:Period of time in which quantities of one or more production factors cannot be changed. These inputs are called fixed inputs.

Long-runAmount of time needed to make all production inputs variable.

Isoquants AssumptionsFood producer has two inputs Labor (L) & Capital (K)

IsoquantsCurves showing all possible combinations of inputs that yield the same output

Isoquants Observations:

1) For any level of K, output increases with more L. 2) For any level of L, output increases with more K. 3) Various combinations of inputs produce the same output.

Production Function for FoodLabor Input Capital Input 1 1 2 3 4 5 20 40 55 65 75 2 40 60 75 85 90 3 55 75 90 100 105 4 65 85 100 110 115 5 75 90 105 115 120

Production with Two Variable Inputs (L,K)Capital per year

5 4 3 2

E

The Isoquant Map

A

B

C

The isoquants are derived from the production function for output of of 55, 75, and 90.

Q3 = 90 1 1 2 3D

Q2 = 75 Q1 = 55 4 5Labor per year

IsoquantsInput Flexibility

The isoquants emphasize how different input

combinations can be used to produce the same output. This information allows the producer to

respond efficiently to changes in the markets for inputs.

The Cost Minimizing Input Choice

The Isocost LineC = wL + rK W: wage (price of labor) r = Depreciation Rate + Interest Rate. (user cost or price of capital) Isocost: A line showing all combinations of L & K that can be purchased for the same cost

Cost in the Long RunThe Isocost Line Rewriting C as linear: K = C/r - (w/r)LSlope of the isocost:(K (L !w

r

is the ratio of the wage rate to rental cost of capital. This shows the rate at which capital can be substituted for labor with no change in cost.

Choosing Inputs We will address how to minimize cost for a

given level of output.We will do so by combining isocosts with isoquants

Producing a Given Output at Minimum CostCapital per yearQ1 is an isoquant for output Q1. Isocost curve C0 shows all combinations of K and L that can produce Q1 at this cost level.

K2CO C1 C2 are three isocost lines

A K1 K3 C0 L2 L1 C1 L3 Q1

Isocost C2 shows quantity Q1 can be produced with combination K2L2 or K3L3. However, both of these are higher cost combinations than K1L1.

C2Labor per year

Input Substitution When an Input Price ChangeCapital per yearIf the price of labor changes, the isocost curve becomes steeper due to the change in the slope -(w/L).

B K2 A K1

This yields a new combination of K and L to produce Q1. Combination B is used in place of combination A. The new combination represents the higher cost of labor relative to capital and therefore capital is substituted for labor.

Q1 C2 L2 L1 C1Labor per year

Cost in the Long Run Isoquants and Isocosts and the Production

Function

MRTS ! - (K

(L

! MP L

MP K! w r

Slope of isocost line ! (Kand ! MPL MPK !w r

(L

Cost in the Long Run The minimum cost combination can then be

written as:

MPL

w

! MPK

r

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.

Cost in the Long Run Cost minimization with Varying Output

LevelsA firm s expansion path shows the minimum cost combinations of labor and capital at each level of output.

A Firm s Expansion PathCapital per year 150 $3000 Isocost LineThe expansion path illustrates the least-cost combinations of labor and capital that can be used to produce each level of output in the long-run.

$2000 Isocost Line

Expansion Path C

100 75 B 50 A 25200 Unit Isoquant 300 Unit Isoquant

50

100

150

200

300

Labor per year

The Inflexibility of Short-Run ProductionCapital per year

E CThe long-run expansion path is drawn as before..

Long-Run Expansion Path

A K2 P K1 Q1L1 L2 B L3 D F Labor per year

Short-Run Expansion Path

Q2

End of today Thx