The Costs of Production: John.V.Sugumaran
The Costs of Production: John.V.Sugumaran
The Costs of Production: John.V.Sugumaran
JOHN.V.SUGUMARAN,
SLET MBA., MCS., MPHIL., PGDCA.,
UNIT-II
Theory of productionproduction function- law of returns to scale- economies of scale- cost analysis- cost concepts-cost functions- short run and long run cost out-put relationship
A Firms Profit
Profit is the firms total revenue minus its total cost.
Accounting profit
Revenue Implicit costs Total opportunity costs Revenue
Explicit costs
Explicit costs
Marginal = product
A Production Function...
Quantity of Output (cookies per hour) 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10
Production function
Total Fixed Costs (TFC) Total Variable Costs (TVC) Total Costs (TC)
TC = TFC + TVC
0 1 2 3 4 5 6 7 8 9 10
$ 3.00 3.30 3.80 4.50 5.40 6.50 7.80 9.30 11.00 12.90 15.00
$3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
$ 0.00 0.30 0.80 1.50 2.40 3.50 4.80 6.30 8.00 9.90 12.00
Total-Cost Curve...
$16.00 $14.00 $12.00
Total-cost curve
Total Cost
10
12
Average Costs
Average costs can be determined by dividing the firms costs by the quantity of output produced. The average cost is the cost of each typical unit of product.
0 1 2 3 4 5 6 7 8 9 10
$3.00 1.50 1.00 0.75 0.60 0.50 0.43 0.38 0.33 0.30
$0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20
$3.30 1.90 1.50 1.35 1.30 1.30 1.33 1.38 1.43 1.50
Marginal Cost
Marginal cost (MC) measures the amount total cost rises when the firm increases production by one unit. Marginal cost helps answer the following question:
How
Marginal Cost
(Change in total cost) MC = (Change in quantity) = TC
MC
Costs
$2.00 $1.50 $1.00 $0.50
ATC AVC
AFC
0 2 4 6 8 10 12
$0.00
MC
Costs
$2.00 $1.50 $1.00 $0.50
ATC
$0.00
0 2 4 6 8 10 12
The average-total-cost curve is U-shaped. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost. Work on homework assignment!
between fixed and variable costs depends on the time horizon being considered.
In
the short run some costs are fixed. In the long run fixed costs become variable costs.
Economies of scale 0
Diseconomies of scale
Quantity of Cars per Day