COST AND PRODUCTION.

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Presentation transcript:

COST AND PRODUCTION

EARTH PROVIDES ENOUGH TO SATISFY EVERY MAN’S NEED BUT NOT EVERY MAN’S GREED

LIMITED/SCARCE RESOURCES UNLIMITED WANTS LIMITED/SCARCE RESOURCES MULTIPLE / ALTERNATIVE USES OF RESOURCES

INPUTS / FACTORS OF PRODUCTION LAND BUILDING MACHINERY LABOUR RAW MATERIAL TECHNOLOGY

COST IS A FUNCTION OF PRODUCTION PROFIT IS EXCESS OF REVENUE OVER COST

COST FUNCTION A COMBINATION OF MORE THAN ONE INPUTS TO PRODUCE A DESIRED LEVEL OF OUTPUT WHICH IS LEAST EXPENSIVE

TYPES OF COST TOTAL FIXED COST (TFC) – TOTAL COST TO EMPLOY FIXED INPUTS. FIXED COSTS DO NOT CHANGE AS OUTPUT LEVELS CHANGE. TOTAL VARIABLE COST (TVC) – TOTAL COST TO EMPLOY VARIABLE INPUTS TO PRODUCE A GIVEN LEVEL OF OUTPUT. VARIABLE COSTS CHANGE AS OUTPUT LEVELS CHANGE.

TYPES OF COST TC = TFC +TVC TOTAL COST (TC) – TOTAL COST OF PRODUCING A GIVEN LEVEL OF OUTPUT INCLUDING BOTH VARIABLE AND FIXED COSTS. TC IS CALCULATED AS- TC = TFC +TVC

TOTAL COST / OUTPUT = TC / Y = AVC + AFC TOTAL AVERAGE COST AVERAGE TOTAL COST (ATC) – TOTAL COSTS PER UNIT OF OUTPUT WHEN PRODUCING A CERTAIN AMOUNT OF OUTPUT. ATC IS CALCULATED AS- TOTAL COST / OUTPUT = TC / Y = AVC + AFC

MARGINAL COST MARGINAL COST (MC) – CHANGE IN THE COST TO PRODUCE AN ADDITIONAL UNIT OF OUTPUT. MC IS CALCULATED AS- CHANGE IN TC OR CHANGE IN TVC

RELATION BETWEEN COSTS THE RELATIONSHIP BETWEEN ATC, AVC, AND MC IS SHOWN ON THE GRAPH BELOW (NOTE THAT OUTPUT IS NOW ON THE HORIZONTAL AXIS) NOTE THE GENERAL RELATIONSHIPS BETWEEN THE COST CURVES

SUMMARY The average-total-cost curve is U-shaped. The marginal-cost curve always crosses the average-total-cost curve at the minimum of ATC. A firm’s costs often depend on the time horizon being considered.

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