Production and cost

Overview ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Production Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object]

Total Product ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Marginal Product of Labor ,[object Object],[object Object],[object Object]

Average Product of Labor ,[object Object],[object Object]

Q=F(K,L) Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns Stages of Production Q L MP AP

Isoquant ,[object Object],[object Object],L

Linear Isoquants ,[object Object],Q 3 Q 2 Q 1 Increasing Output L K

Leontief Isoquants ,[object Object],[object Object],Q 3 Q 2 Q 1 K Increasing Output

Cobb-Douglas Isoquants ,[object Object],[object Object],[object Object],Q 1 Q 2 Q 3 K L Increasing Output

Isocost ,[object Object],[object Object],[object Object],K L C 1 C 0 L K New Isocost Line for a decrease in the wage (price of labor).

Cost Minimization ,[object Object],[object Object]

Cost Minimization Q L K Point of Cost Minimization Slope of Isocost = Slope of Isoquant

Cost Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object]

Total and Variable Costs ,[object Object],[object Object],[object Object],[object Object],$ Q C(Q) = VC + FC VC(Q) FC

Fixed and Sunk Costs FC: Costs that do not change as output changes Sunk Cost: A cost that is forever lost after it has been paid $ Q FC C(Q) = VC + FC VC(Q)

Some Definitions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],ATC AVC AFC $ Q MC

Fixed Cost ATC AVC Q 0 AFC Fixed Cost Q 0  (ATC-AVC) = Q 0  AFC = Q 0  (FC/ Q 0 ) = FC $ Q ATC AVC MC

Variable Cost AVC Variable Cost Q 0 Q 0  AVC = Q 0  [VC(Q 0 )/ Q 0 ] = VC(Q 0 ) $ Q ATC AVC MC

ATC Total Cost Q 0 Q 0  ATC = Q 0  [C(Q 0 )/ Q 0 ] = C(Q 0 ) Total Cost $ Q ATC AVC MC

Economies of Scale LRAC $ Output Economies of Scale Diseconomies of Scale

An Example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Multi-Product Cost Function ,[object Object]

Economies of Scope ,[object Object],[object Object]

Cost Complementarity ,[object Object],[object Object]

Quadratic Multi-Product Cost Function ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

A Numerical Example: ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Production and cost

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