Cost of Production

24
30 Oktober 2007

Transcript of Cost of Production

Page 1: Cost of Production

30 Oktober 2007

Page 2: Cost of Production

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

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Cost of production

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Measuring Cost:Which Costs Matter?

Accounting Cost Actual expenses plus depreciation charges for capital equipment

Economic Cost Cost to a firm of utilizing economic resources in production, including opportunity costOpportunity cost. Cost associated with opportunities that are

foregone when a firm’s resources are not put to their highest-value use.

Economic Cost vs. Accounting Cost

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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 Costs A 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.

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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.

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Economic versus Accountants

Revenue

Totalopportunitycosts

How an EconomistViews a Firm

How an AccountantViews a Firm

Revenue

Economicprofit

Implicitcosts

Explicitcosts

Explicitcosts

Accountingprofit

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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-run Amount of time needed to make all

production inputs variable.

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Isoquants

Assumptions Food producer has two inputs

Labor (L) & Capital (K)

Isoquants Curves showing all possible

combinations of inputs that yield the same output

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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.

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Production Function for Food

1 20 40 55 65 752 40 60 75 85 903 55 75 90 100 1054 65 85 100 110 1155 75 90 105 115 120

Capital Input 1 2 3 4 5

Labor Input

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Production with Two Variable Inputs (L,K)

Labor per year

1

2

3

4

1 2 3 4 5

5

Q1 = 55

The isoquants are derivedfrom the production

function for output ofof 55, 75, and 90.A

D

B

Q2 = 75Q3 = 90

C

ECapitalper year The Isoquant Map

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Isoquants

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.

Input Flexibility

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The Isocost Line C = 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

The Cost Minimizing Input Choice

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Cost in the Long Run

Rewriting C as linear: K = C/r - (w/r)L Slope of the isocost:

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.

rwLK

The Isocost Line

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Choosing Inputs

We will address how to minimize cost for a given level of output. We will do so by combining isocosts with

isoquants

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Producing a GivenOutput at Minimum Cost

Labor per year

Capitalper

year

Isocost C2 shows quantity Q1 can be produced withcombination K2L2 or K3L3.However, both of these

are higher cost combinationsthan K1L1.

Q1

Q1 is an isoquantfor output Q1.

Isocost curve C0 showsall combinations of K and Lthat can produce Q1 at this

cost level.

C0 C1 C2

CO C1 C2 arethree

isocost linesA

K1

L1

K3

L3

K2

L2

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Input Substitution When an Input Price Change

C2

This 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.

K2

L2

B

C1

K1

L1

A

Q1

If the price of laborchanges, the isocost curvebecomes steeper due to

the change in the slope -(w/L).

Labor per year

Capitalper

year

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Cost in the Long Run

Isoquants and Isocosts and the Production Function

KL

MPMP- MRTS

LK

rw

LK

lineisocost of Slope

rw

MPMP

K

L and

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Cost in the Long Run

The minimum cost combination can then be written 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.

rwKL MPMP

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Cost minimization with Varying Output Levels A firm’s expansion path shows the

minimum cost combinations of labor and capital at each level of output.

Cost in the Long Run

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A Firm’s Expansion Path

Labor per year

Capitalper

year

Expansion Path

The expansion path illustratesthe least-cost combinations oflabor and capital that can be used to produce each level of

output in the long-run.

25

50

75

100

150

10050 150

300

200

A

$2000Isocost Line

200 UnitIsoquant

B

$3000 Isocost Line

300 Unit Isoquant

C

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Long-RunExpansion Path

The long-run expansionpath is drawn as before..

The Inflexibility ofShort-Run Production

Labor per year

Capitalper

year

L2

Q2

K2

D

C

F

E

Q1

A

BL1

K1

L3

PShort-RunExpansion Path

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