Slope of isoquant Marginal Rate of technical substitution: change in capital/change in labor= Diminishing marginal rate of technical substitution.

Slides:



Advertisements
Similar presentations
Producer decision Making Frederick University 2013.
Advertisements

Cost and Production Chapters 6 and 7.
Explicit Costs Economic Costs Relevant Costs Accounting Costs
ECON107 Principles of Microeconomics Week 11 NOVEMBER w/11/2013 Dr. Mazharul Islam Chapter-11.
PRODUCTION As always, the firm will organize its means of production to maximize profit. Chapter 5 slide 1 To do this it must balance input productivity.
Chapter Seven Costs. © 2007 Pearson Addison-Wesley. All rights reserved.7–2 Application Choosing an Ink-Jet or a Laser Printer: –You decide to buy a printer.
Chapter 6 Production and Cost
Chapter Seven Costs © 2008 Pearson Addison Wesley. All rights reserved.
Cost Minimization An alternative approach to the decision of the firm
9 - 1 Copyright McGraw-Hill/Irwin, 2005 Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run.
Economics 101 – Section 5 Lecture #13 – February 26, 2004 Introduction to Production.
1 Chapter 7 Production Costs Key Concepts Summary Practice Quiz Internet Exercises Internet Exercises ©2002 South-Western College Publishing.
Unit 5 - Cost Functions Explicit Costs and Implicit Costs
The Costs of Production 1 22 C H A P T E R Costs exist because resources Are scarce Productive Have alternative uses Use of a resource in a specific.
Topic on Production and Cost Functions and Their Estimation.
Costs and the Changes at Firms over Time
Marginal Rate of Technical Substitution: The rate at which one factor can be substituted for another factor while maintaining a constant level of output.
Chapter 10 Production Profit Definitions. What is a firm? A firm is a business organization that brings together and coordinates the factors of production.
Costs of Production Mr. Bammel. Economic Costs  Businesses have costs for the same reason that consumers do: Scarcity; Essentially the resources that.
The Costs of Production Chapter 8 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Measuring Cost: Which Costs Matter?
The Costs of Production Ratna K. Shrestha
Production & Cost in the Firm ECO 2013 Chapter 7 Created: M. Mari Fall 2007.
The Costs of Production Chp: 8 Lecture: 15 & 16. Economic Costs  Equal to opportunity costs  Explicit + implicit costs  Explicit costs  Monetary payments.
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Costs of Production Chapter 6.
David Bryce © Adapted from Baye © 2002 Production and Supply MANEC 387 Economics of Strategy MANEC 387 Economics of Strategy David J. Bryce.
By: Christopher Mazzei. Viewpoints The owner of a company wants to keep costs down. An employee of the company wants a high wage or salary. There is always.
Copyright McGraw-Hill/Irwin, 2005 Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run.
8 - 1 Economic Costs Short-Run and Long-Run Short-Run Production Relationships Short-Run Production Costs Short-Run Costs Graphically Productivity and.
Chapter 7 Production and Cost of the Firm
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. c h a p t e r ten Prepared by: Fernando & Yvonn Quijano.
The Costs of Production
Production Cost and Cost Firm in the Firm 1 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part,
PPA 723: Managerial Economics Study Guide: Production, Cost, and Supply.
COSTS OF THE CONSTRUCTION FIRM
Michael Parkin ECONOMICS 5e Output and Costs 1.
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. The Costs of Production Chapter 8.
1 Chapter 8 Costs and the Supply of Goods. 2 Overview  Shirking and the Principle-Agent Problem  The 3 Types of Business Firms  Economic vs. Accounting.
The Costs of Production Chapter 6. In This Chapter… 6.1. The Production Process 6.2. How Much to Produce? 6.3. The Right Size: Large or Small?
Cost Theory and Estimation Dr Nihal Hennayake
Cost & Production Theory Firms seek to produce any given quantity of output (Q) at lowest cost. Firms are cost minimizers.
Chapter 7 The Cost of Production. Chapter 7Slide 2 Topics to be Discussed Measuring Cost: Which Costs Matter? Cost in the Short Run Cost in the Long Run.
Principles of Microeconomics : Ch.13 Second Canadian Edition Chapter 13 The Costs of Production © 2002 by Nelson, a division of Thomson Canada Limited.
Economics 2010 Lecture 11’ Organizing Production (II) Production and Costs (The long run)
Economies of Scale Chapter 13 completion. The Shape of Cost Curves Quantity of Output Costs $ MC ATC AVC AFC.
Chapter 7 Production and Cost in the Firm © 2009 South-Western/Cengage Learning.
Prof. Ana Corrales ECO 2023 Notes Ch. 22: The Costs of Production Economic/Opportunity Cost: Value or worth of any resource used to produce a good from.
Background to Supply. Background to Supply The Short-run Theory of Production.
Chapter Seven Costs. © 2009 Pearson Addison-Wesley. All rights reserved. 7-2 Topics  Measuring Costs.  Short-Run Costs.  Long-Run Costs.  Lower Costs.
The Costs of Production
1 Production Costs Economics for Today by Irvin Tucker, 6 th edition ©2009 South-Western College Publishing.
Chapter 6: Perfectly Competitive Supply
Businesses and the Costs of Production 07 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
CDAE Class 20 Nov 2 Last class: 5. Production 6. Costs Quiz 6 (Sections 5.1 – 5.7) Today: Results of Quiz 5 6. Costs Next class: 6. Costs Important.
Micro Review Day 2. Production and Cost Analysis I 12 Firms Maximize Profit For economists, total cost is explicit payments to the factors of production.
Chapter 6 Production, Cost, and Profit © 2001 South-Western College Publishing.
Chapter 20 The Costs of Production
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 8 The Costs of Production.
Production & Costs in the Short-run
Chapter 6 Production Costs
Production and Cost in the Firm
BEC 30325: MANAGERIAL ECONOMICS
Economics Chapter 5: Supply.
McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
The Costs of Production
Chapter 4: The Costs of Production
Presentation transcript:

Slope of isoquant Marginal Rate of technical substitution: change in capital/change in labor= Diminishing marginal rate of technical substitution

Shape of Isoquants

Imperfect substitution between inputs

Return to scale For the decision making in the long-run Constant return to scale: Property of production function whereby when all inputs are increased by a certain percentage, output increase by that same percentage. –f(2L, 2K)=2f(L,K) Increasing return to scale: ---, output increases more than in proportion to an equal increase in all inputs. –f(2L,2K)>2f(L,K) Decreasing return to scale: ---, output increases less than –f(2L,2K)<2f(L,K)

Chapter 7. Costs Costs

Measuring costs Explicit cot: Firm’s direct, out-of-pocket cost (wage, payment for material) Implicit cost: The value of other resources used but not purchased –Example: Opportunity cost; The value of best alternative use of a resource

Research about Opportunity Cost In 1988 the U.S. Fish and Wildlife Service, under provisions of the Endangered Species Act (ESA), declared two fish species in the Klamath Basin as endangered and mandated minimum water levels in Upper Klamath Lake to protect habitat for these species. watch?v=s7LL_wxb2tohttp:// watch?v=s7LL_wxb2to

ESA lake level restrictions reduced both expected average irrigation water supplies and the capacity of the lake to stabilize water supplies during drought cycles. This research measures the opportunity cost to agriculture of maintaining alternative lake levels for the benefit of the endangered species. - In response to the needs to come up with estimates to subsidize farmers’ loss.

Lake Level vs. Opportunity Cost The expected average cost of maintaining ESA lake levels (estimated over 73 water years) is approximately $2 million annually; for severe drought years, annual costs exceed $15 million or about 60% of average farm profits. The steeply increasing marginal cost curve shows an increasingly heavier opportunity cost to agriculture as lake level restrictions increase.

Short-run cost measures Fixed cost: Production expense that does not vary with output (e.g., land, plant, large machines, other capital goods) Variable cost: Production expense that changes with the quantity of output (e.g., labor and materials) Total cost: Sum of variable and fixed costs Marginal cost: Average cost –Average fixed cost (AFC)= F/q –Average variable cost (AVC) = VC/q –Average cost = AFC +AVC

Variation of Short-Run Cost with Output

Short-Run Cost Curves