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    Chapter11 - Production-And-Cost-Analysis1

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    Sandara beldo
    1) Firms transform factors of production like land, labor, and capital into goods and services for consumers. A firm's main objective is to maximize profit by producing at the quantity where total revenue exceeds total cost. 2) In the short run, some inputs are fixed and firms are constrained in their production decisions. In the long run, all inputs are variable and firms can choose any production technique. 3) Total costs are the sum of fixed costs, which do not change with output, and variable costs, which do change with output. Marginal cost is the change in total cost from producing one additional unit of output.

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    Chapter11 - Production-And-Cost-Analysis1

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    Sandara beldo
    40 views24 pages
    1) Firms transform factors of production like land, labor, and capital into goods and services for consumers. A firm's main objective is to maximize profit by producing at the quantity where total revenue exceeds total cost. 2) In the short run, some inputs are fixed and firms are constrained in their production decisions. In the long run, all inputs are variable and firms can choose any production technique. 3) Total costs are the sum of fixed costs, which do not change with output, and variable costs, which do change with output. Marginal cost is the change in total cost from producing one additional unit of output.

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    Chapter11- Production-and-cost-analysis1

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    1) Firms transform factors of production like land, labor, and capital into goods and services for consumers. A firm's main objective is to maximize profit by producing at the quantity where total revenue exceeds total cost. 2) In the short run, some inputs are fixed and firms are constrained in their production decisions. In the long run, all inputs are variable and firms can choose any production technique. 3) Total costs are the sum of fixed costs, which do not change with output, and variable costs, which do change with output. Marginal cost is the change in total cost from producing one additional unit of output.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    40 views24 pages

    Chapter11 - Production-And-Cost-Analysis1

    Uploaded by

    Sandara beldo
    1) Firms transform factors of production like land, labor, and capital into goods and services for consumers. A firm's main objective is to maximize profit by producing at the quantity where total revenue exceeds total cost. 2) In the short run, some inputs are fixed and firms are constrained in their production decisions. In the long run, all inputs are variable and firms can choose any production technique. 3) Total costs are the sum of fixed costs, which do not change with output, and variable costs, which do change with output. Marginal cost is the change in total cost from producing one additional unit of output.

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    PRODUCTION

    and

    COST ANALYSIS I
    by: Beldo, Sandara N.
    BA- ECONOMICS, B2G
    CHAPTER GOALS

    Explain the role of firm in economic analysis.


    Describe the production process in the short run.
    Calculate fixed cost, variable cost, marginal cost, total cost,
    average fixed cost, average variable cost, and average total cost.
    Distinguish the various cost curves and describe the relationship
    among them.
    THE ROLE OF THE FIRM

    In the supply process, people offer their factors of production, such as


    land, labor, and capital, to the market.
    Firms transform the factors into goods and services to consumers.

    Production is the transformation of factors into goods.

    Ultimately, all supply comes from individuals because


    they control the factors of production.
    A firm is an economic institution that transforms factors of
    production into goods and services.
    Firms: 1. Organize factors of production and/or
    2. Produce goods and services and/or
    3. Sell produce goods and services

    Some businesses don't have a physical location and don't actually


    "produce" anything; instead, they outsource all of their production.
    The production process is increasingly being divided from many
    organizational structures in business.
    FIRMS MAXIMIZE PROFIT
    A firm's main objective is to maximize profit.

    Profit = Total revenue - Total cost

    According to economists, the total cost includes the direct payments


    made to the production factors as well as the opportunity costs
    associated with using the factors that the company's owner supplied.
    According to economists, a firm's total revenue is the sum of the money
    it makes from selling its goods and services plus any growth in the value
    of the assets it owns.
    Differences between how accountants and economists define profit.

    Accountants focus on explicit cost and revenues.


    Accounting profit = explicit revenue - explicit cost

    Economists focus on both explicit and implict cost and revenue


    Economic profit = (Explicit and implict revenue) - (Explicit and implict cost)
    The Production Process
    The production process can be divided into in the long run and the short run.
    short run
    A firm is constrained in regard to what production decisions it make.
    Some inputs are fake.

    long run

    A firm chooses from all possible production techniques.


    All inputs are variable.
    The term long run and short run do not necessarily refer to specific
    periods of time, but to the flexibility the firm has in changing its inputs.
    Production
    and
    tables A production table is a table showing

    PRODUCTION the output resulting from various


    combination of factors of production or

    FUNCTIONS inputs.

    Real-world production tables are


    complicated.
    A PRODUCTION TABLE
    GRAPHING A PRODUCTION FUNCTION

    Page 10 of 23
    GRAPHING MARGINAL AND
    AVERAGE PRODUCTIVITY

    Page 11 of 23
    Law MARGINAL
    of diminishing
    PRODUCTIVITY
    FIXED COSTS, VARIABLE
    COSTS, AND TOTAL COSTS
    Fixed costs (FC) are those that are spent and cannot be changed in the period of
    time under consideration.
    In the long run, there are no fixed costs since all inputs (and their costs) are
    variable.
    In the short run, a number of inputs and their costs will be fixed.

    Workers are an example of variable costs (VC) which are costs that change as output
    changes.
    The sum of the variable and fixed costs are total costs (TC)
    TC = FC + VC
    Average costs
    Average fixed costs (AFC) equals fixed costs devided by
    quantity produced, AFC = FC/Q
    Average variable costs (AVC) equals variable cost devided
    by quantity produced, AVC = VC/Q
    Average total costs (ATC) equals total costs devided by
    quantity produced, ATC = TC/Q or ATC = AFC + AVC
    Marginal cost
    Marginal cost (MC) is the increase in total cost when
    output increases by one unit, MC = ∆TC/∆Q
    Cost of
    PRODUCTION TABLE
    Graphing total
    COST CURVES
    Graphing per unit
    OUTPUT COST CURVES
    The shapes of cost curves
    The variable and total cost curves are upward sloping.
    Increasing output increases VC and TC
    The fixed cost curves is always constant.
    Increasing output doe change FC
    The average fixed cost curve is downard sloping.
    Increasing output decreasing AFC
    The marginal cost, average variable cost, average total cost
    curves are U-shaped.
    Increasing output initially leads to a decrease in MC,
    AVC, and ATC but eventually they increase.
    The shapes of
    the average cost curves
    The U-shape of ATC and AVC curves is due to:
    When output is increased in the short run, it can only
    be done by increasing the variable input.
    The law of diminishing productivity causes marginal
    and average productivites to fall.
    Average and marginal productivites fall, average and
    marginal costs rise.
    The marginal cost curve goes through the minimum
    points of the ATC and AVC curves.
    THE RELATIONSHIP BETWEEN MARGINAL
    PRODUCTIVITY AND MARGINAL COST
    THE RELATIONSHIP
    BETWEEN
    MARGINAL COST
    AND AVERAGE
    COST

    If MC > ATC, then ATC is rising.


    If MC > AVC, then AVC is rising.
    If MC < ATC, then ATC is falling.
    If MC < AVC, then AVC is falling.
    The relationship between
    MARGINAL COST AND AVERAGE COST
    THAT'S ALL
    THANK YOU!

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