BAEB602 Chapter 5: Cost Production
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BAEB602 Chapter 5: Cost Production
- 1. BAEB602 MICROECONOMICS CHAPTER 5 COST PRODUCTION PREPARED BY: Nur Suhaili Ramli School of Marketing and Entrepreneurship (SoME) FACULTY OF BUSINESS AND MANAGEMENT
- 2. CHAPTER 5: COST PRODUCTION The Meaning of Costs TOPIC Opportunity costs meaning of opportunity cost examples Measuring a firm’s opportunity costs factors not owned by the firm: explicit costs factors already owned by the firm: implicit costs irrelevance of: historic costs replacement costs Slide 2 of 17
- 3. CHAPTER 5: COST PRODUCTION Production in the Short run TOPIC Production functions factors of production labour land and raw materials capital entrepreneurship the relationship between inputs and output TPP = ƒ(F1, F2, F3, … Fn) Slide 3 of 17
- 4. CHAPTER 5: COST PRODUCTION Production in the Short run TOPIC Long-run and short-run production fixed and variable factors distinction between short run and long run The law of diminishing returns The short-run production function: total physical product (TPP) average physical product (APP) marginal physical product (MPP) the graphical relationship between TPP, APP and MPP Slide 4 of 17
- 5. CHAPTER 5: COST PRODUCTION Costs in the Short run TOPIC Costs and inputs costs and the productivity of factors costs and the price of factors Fixed costs and variable costs Total costs total fixed cost (TFC) total variable cost (TVC) TVC and the law of diminishing returns total cost (TC = TFC + TVC) Slide 5 of 17
- 6. CHAPTER 5: COST PRODUCTION Costs in the Short run TOPIC Marginal cost marginal cost (MC) and the law of diminishing returns Slide 6 of 17
- 7. CHAPTER 5: COST PRODUCTION Costs in the Short run TOPIC Marginal cost marginal cost (MC) and the law of diminishing returns the relationship between MC and TC curves Slide 7 of 17
- 8. CHAPTER 5: COST PRODUCTION Costs in the Short run TOPIC Average cost average fixed cost (AFC) average variable cost (AVC) average (total) cost (AC) Relationship between average and marginal cost Slide 8 of 17
- 9. CHAPTER 5: COST PRODUCTION Production in the Long run TOPIC All factors variable in long run The scale of production: constant returns to scale increasing returns to scale decreasing returns to scale Returns to scale and economies and diseconomies of scale Slide 9 of 17
- 10. CHAPTER 5: COST PRODUCTION Production in the Long run TOPIC Economies of scale specialisation & division of labour indivisibilities container principle greater efficiency of large machines by-products multi-stage production organisational & administrative economies financial economies Economies of scope Slide 10 of 17
- 11. CHAPTER 5: COST PRODUCTION Production in the Long run TOPIC Diseconomies of scale managerial diseconomies effects of workers and industrial relations risks of interdependencies External economies of scale External diseconomies of scale Location balancing the distance from suppliers and consumers importance of transport costs Slide 11 of 17
- 12. CHAPTER 5: COST PRODUCTION Production in the Long run TOPIC Optimum combination of factors MPPa/Pa = MPPb/Pb ... = MPPn/Pn Decision making in different time periods very short run short run long run very long run decisions can be made for all time periods at the same time Slide 12 of 17
- 13. CHAPTER 5: COST PRODUCTION Costs in the Long run TOPIC Long-run average costs shape of the LRAC curve assumptions behind the curve Slide 13 of 17
- 14. CHAPTER 5: COST PRODUCTION Costs in the Long run TOPIC Long-run average costs shape of the LRAC curve assumptions behind the curve Long-run marginal costs Slide 14 of 17
- 15. CHAPTER 5: COST PRODUCTION Costs in the Long run TOPIC Long-run average costs shape of the LRAC curve assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs Slide 15 of 17
- 16. CHAPTER 5: COST PRODUCTION Costs in the Long run TOPIC Long-run average costs shape of the LRAC curve assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs the envelope curve Slide 16 of 17
- 17. CHAPTER 5: COST PRODUCTION Costs in the Long run TOPIC Long-run average costs shape of the LRAC curve assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs the envelope curve Long-run cost curves in practice Slide 17 of 17
- 18. CHAPTER 5: COST PRODUCTION Costs in the Long run TOPIC Long-run average costs shape of the LRAC curve assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs the envelope curve Long-run cost curves in practice the evidence Slide 18 of 17
- 19. CHAPTER 5: COST PRODUCTION Costs in the Long run TOPIC Long-run average costs shape of the LRAC curve assumptions behind the curve Long-run marginal costs Relationship between long-run and short-run average costs the envelope curve Long-run cost curves in practice the evidence minimum efficient plant size Slide 19 of 17
- 20. CHAPTER 5: COST PRODUCTION Class Activity TOPIC Before leaving the class, you should submit the following: Identify the following Short run Long run Total cost Total average cost Name, ID, classcode Slide 20 of 17