صفحه 1:
The Cost oP
صفحه 2:
لحعجصمح() عا با Vopios
a Ovusurieryy Cost: Dhick Costs Detter?
© Costin the Gkort Qua
a Oost ia the Lowry Rua
a )مورا Orrsus Gkort-Rua Cust
Cures
0 Oke S
صفحه 3:
لحعوصیح() را to جزم:]»
Outputs--Eroowwies جنب“ كلسب حوس لجرت ®
oF Goope
® Qponio Chases ia Costs--The Leurcitcgy
Cure
© Gstcoatiogy ud (Prediction; Cost
0 Oke SD
صفحه 4:
حصلاص ۹
جكاا سح نوصاصجادها مصاص لوم د[ 5
ioput ord vulput. ۱
® Gived the production tevkooloxp, 7۳۳۶
wust choose Aow to produce.
۱
0 Oke
صفحه 5:
حصلاص ۹
8 Do سل the vptivod bevel oP له نون
the input powwbicaives, we wut power
Prow the voit weosureweuts oP the
productive techuolowpy to dolar
WEE ves Dr ۰
0 Oke S
صفحه 6:
:02 ۱+عه()
Okick Costs Outer?
® @ovountice, Cust
© Cot expewses phis depreciation charges Por
pupitd equipweat
® Coowwir Cust
© Cost too Piro oP ی زاف neSoUrceES
io proocuotiva, ioctudiogy ppportucily cost
0 Oke Oo
صفحه 7:
:02 ۱+عه()
Okick Costs Outer?
© Opporiniity vost.
® Cost ussocicted with ppportucittes that ane
]۱ o Pirss’s resvurves une ul put
to their highest-volue use.
0 6
صفحه 8:
:02 ۱+عه()
Okick Costs Outer?
® Oa Cxanple
© )8 Bice owes افا منص جا cod pays op rect
Por oP Rive spose
® Oves this weun the vost oP oPPice space is
zerv?
0 Oke O
صفحه 9:
:02 ۱+عه()
Okick Costs Outer?
™ Guck Oost
© @xpecdiure thot kes beeo wade cod موی
recovered
بل تا و واه بو تلا و
0 Oke SO
صفحه 10:
:02 ۱+عه()
Okick Costs Outer?
" Oa Cxavpe
© @ Pre pas $600,000 Por ها و موه مت a
braikcicrcy.
© Dhe vost oF the build مطللاف ©5 دا or a total oF
$S.S لاب
© Dhe Pircr Pirds carter buitdioy Por $9.28 لت
© Dhick bubdiogy should the Piro buy?
0 ۵ 0
صفحه 11:
the Lovaticn روما
Por a Dew baw Grkool Buldicey
® Oorthwestera Oniversity Law Grkvvl
0) Cured locatiog it douwetowve
Chicago
©) Oltercaive location ia Cucrsioc
with the wot popu
0 Olde 0
صفحه 12:
the Lovaticn روما
Por a Dew baw Grkool Buldicey
® Oorthwestera Oniversity Luw Sokol
9) Chovsicry a Gite
مورا pwoed iat Chica
* Oust purckuse hod ict Cvocsiod
* Chicas locaicd wight appear cheuper
without pousidertay the opportu cost oP the
dowetoww board (ie. what لامك عط لاتحت نا
Por)
صفحه 13:
the Lovaticn روما
Por a Dew baw Grkool Buldicey
® Oorthwestera Oniversity Luw Sokol
9) Chovsicry a Gite
* اجه رصح موه شمسا پمال
02037 میم ase:
اش وتو betag ia Ohivago
O4P ant, it wos oo ive Piviedt devisiod iP it wos
bused oa the ossucyptiiod thot the dowetoud
0 ee
صفحه 14:
:02 ۱+عه()
Okick Costs Outer?
Cred werd Ovrtuble Ovsts
Dordt pulpal is « Poontiva oP vartuble taputs "ا
ord Pied ioputs.
® DherePore, the totd cost oP productiva
ee ene tee ee cel Gee eiee
| vortuble ioputs), ore...
PO=PC+ OC
صفحه 15:
:02 ۱+عه()
Okick Costs Outer?
Chard ued Ourtuble Ovste
© Pixed Ovst
© Opes ot vary wih the fevel oP ان
® Ourtuble Oust
© ما رل vores us pulp vores
صفحه 16:
Cust: سعوه()
Okick Costs Outer?
Pixed Ovst ©
® Cost par by a Pircr thot is ft busicess
ال oP the evel oP ان
® Guck Oost
© Cost thot hue bee مها ved vacant be
recovered
صفحه 17:
:02 ۱+عه()
Okick Costs Outer?
Person Cowputers! wos posts ure ا"
اهزور
labor ,من ه
GoPivare: woet posts une ah ®
oP developiag the soP wore رن ه ۱
ع0 عبت 0
صفحه 18:
:02 ۱+عه()
Okick Costs Outer?
B® Qiu
© Largest post powpooed is Pred
0 ۵۷» 0
صفحه 19:
® Cire’s Gkort-Rua Costs ($)
(fea see “Sor Oat
Tord
Ovst
رهم
6
(oro)
(v0) (@0)
6090 0
esse 66
1299
49.999 0.6
4۵99 99
6.899 ©
60 2,6۵9
99
ات بت ات سرت 22]
990 9S
99 8
لبون
بو
(00)
60
006060
0666©
06660
06606
0600©
60060
eeses
6666©
6666©
9606©
6066©
Row oP لس
نحن Ovst
(fo)
090 0
460 0
990 0
9860 66
9 008
660 0
690 0
260 9
980 Sor
960 68
1090 90
0060 9
صفحه 20:
Cost ta tke Gkort Qua
® Dargie Cost (DC) is the vost oP
مور culput by vce wait. لا عون
vost hove ام و oo wordicd post, if oot
be vorittest as:
Oko? Obde SD
صفحه 21:
Oost ta the Gkort Qua
® Qverace Mota Cost (BNC) is the vst per
uot DP pulp, or average Pixed post
(®CC) plus weraqe vartuble vost
(BOC). Chis cos be voritiest:
Q
۱ کل وم as
0 Oke Od
صفحه 22:
Cost ia tke Gkort Qua
® Qverace Mota Cost (BNC) is the vst per
uot DP pulp, or average Pixed post
(BOC). Chis cos be voritiest:
Oko? 60-66
صفحه 23:
Oost ta the Gkort Qua
© Phe Oetercoiccnts oP Gkort-Rua Cvst
Phe retoicoskiy beter the producioa و
Puortion ood cost cos be exesvpiPied by either
fopreeusiay retures ued cost or deoreusicy
له سار
وه ی 0
صفحه 24:
Oost ta the Gkort Qua
® Dke Ortercniccats oP Gkort-Rua Cost
© سا مسب usr post
ik رسب retuces, Dulpul is رم relive
to toput ond vortable vost ood total cost wil Poll retative
fo pulpal.
© Oecreusiny retures unt post
ik depreusicgy retuces, pulpal is depreasicny
relative to وه ced voriuble vost ood total ost will
rise relive 9 ان
0 Obde OF
صفحه 25:
Oost ta the Gkort Qua
=o Cxavple: Ossuve the wae rote (w)
is Pixed relative to the wucber oP workers
hired. Thea!
mczuAVE
AQ
\ VC =u.
0 Obte OS
صفحه 26:
Oost ta the Gkort Qua
® Ovotcuicny
AVC =wWAL
WAL
۱ MC=—— 10
ی 0
صفحه 27:
Oost ta the Gkort Qua
® Ovotcuicny
AMB. -
1
iG ~ AMR.
--ح 01۸0 ۲0101 ۳
Oko? Oke OP
صفحه 28:
Oost ta the Gkort Qua
B40 pouches:
Mc=—
MR.
ا 505722200
vise له (20)) نع اوه high و صا ١
۱/۷۲
0 Oke CO
صفحه 29:
Oost ta the Gkort Qua
® Oowequecty (Proc the table):
© OC derrewses intchy Lit ioreustay netures
% 0 throuk & usits oP vuput
© OC مومس wit روص retires
*S نصح خاص عن 0) بيجو
0 Obte SS
صفحه 30:
® Cire’s Gkort-Rua Costs ($)
(fea see “Sor Oat
Tord
Ovst
رهم
6
(oro)
(v0) (@0)
6090 0
esse 66
1299
49.999 0.6
4۵99 99
6.899 ©
60 2,6۵9
99
ات بت ات سرت 22]
990 9S
99 8
لبون
بو
(00)
60
006060
0666©
06660
06606
0600©
60060
eeses
6666©
6666©
9606©
6066©
Row oP لس
نحن Ovst
(fo)
090 0
460 0
990 0
9860 66
9 008
660 0
690 0
260 9
980 Sor
960 68
1090 90
0060 9
صفحه 31:
Dord vost
eheved| TO
on ۶و سح 0
ver wat OO,
isc 00
مم لبون
لاب ی
200 ملسم ood
fhe rate vores wie
سس
مسج retire.
900
(Phoed ovat dere wot
qo vey ik onine
5 eo
9 19 9 6 9 9 00 ۵ w سوه وو و
۲ 0
صفحه 32:
oo
a
®
صفحه 33:
Oost Ourves Por هن
© Dk be draw Prow
the vriqtt to the toogect oF
the vortuble vst curve!
© is slope expt (BOC
© Dhe slope oF o poidt vo
OC equate DO
» DkerePore, DO =
®OC a? vraits oF
pulpul (potat P)
0 ۵ و و < و و ه و و ۱ ©
صفحه 34:
Oost Ourves Por هن
" Quit Ovste
رامش علد۳ 060 ©
©» Mkea OC < BOC or
OC < ®TC, BOC &
®VC decreue
©» Mkea DO > WOO vor
OC > BTC, BOC &
8/10 عوج دا
0 Obde OE
صفحه 35:
Oost Ourves Por هن
" Quit Ovste
® OC = OOC wt
OVO a مه
600 لحم 610
© من POO vers
حذكا اجيج عصيصا جه أن
wisi (BPO dur tz
FC
ی 0
صفحه 36:
Opera عوو ۲) Guelicy ($/Toa
besed va ua vuput oP OOO tows/day)
Ountble costs thot are poostcat ol puput levels
SO ی
$000
999
des
00
560
Cleviricty
@kacoicra
Other raw woterids
loot power urd Poet
سل
صفحه 37:
Opera عوو ۲) Guelicy ($/Toa
besed va ua vuput oP OOO tows/day)
pots thot toreore whea pup exceeds OOO tow/day لبون
Lebor 990
مه( 060
بلس SO
5900 سید
operate) costs 50060 لو
Oko? Ore 0
صفحه 38:
صفحه 39:
Oost ta the Doo Que
The Oser Oost oP Oupitd
® Oser Ovst oF Cupita = Erow-wir
Orpreviction + (Voterest Rate)(Ochue oe
Okepter ? bbe 6
صفحه 40:
Oost ta the Doo Que
® Gxcanople
© Deka bus u Overy POP Por $460 wilica
wits co expected ihe oP OO pears
* Denard eoocexvis cepreviaivs = 0
sali < 36 تب
*oterest rate = ID%
0 ۵ FO
صفحه 41:
Oost ta the Doo Que
The Oser Oost oP Oupitd
" Exaple
© Over Cost oP Cupid = $6 wilioa + (10)
($080 wiloa - depreviction)
Yeu (= $6 wilion + )40(
)50600 حصلاب 520 - (وصلاب
١ ماب 9 < 40 مره + (do)
)500000 مصلاب 506 - (وصلاب
0 9 0
صفحه 42:
Oost ta the Doo Que
The Oser Oost oP Oupitd
® Rate per dolar oP pupil
© = Oeprevitivon Rute + Ioterest Rute
لب 0
صفحه 43:
Oost ta the Doo Que
The Oser Oost oP Oupitd
۱ Oidue Cxcrople
® Depreciation Rate = 4/906 2 9.9 عم
© Rate oP Retura = 10۵۲
® Oser Cost oP Oupitl
49.956 < 0) + 5.55 - ره
0 Obde PS
صفحه 44:
Oost ta the Doo Que
Whe Cost Otakpiztay Iaput Okoice
® @Qsaropiow
© Dive را تا (b) & cepital (1)
© rive oP habor! wage rate (w)
© Phe price OP vapid
* R= مرول rote + toterest rote
© ی 0
صفحه 45:
Oost ta the Doo Que
Whe Cost Otakpiztry 19 ای
® Qvesiivod
۰ یی wes rected, would it choo the در
Pr?
0 Obde PS
صفحه 46:
Oost ta the Doo Que
Whe Cost Otakpiztry 19 ای
© DV ke Isvvvst Lice
» رار دان + ))
ای اه مشاه صمنلا ©8) تیا و oP L &
) لحاوس و مه م۲ ۳ the save ومع
0 Obde FO
صفحه 47:
Oost ta the Doo Que
Vhe Isvcvst bie
© Rewrite O us bara
© K=Of- (uhh
© Gis ch te east AK =-(w/)
* s the rato OP the wae roe to etd cost oP capi.
۰ ۲ shows the rote of whick copital cod be
substituted Por tabor with a7 chooge ia vost.
ع دی 0
صفحه 48:
بسا
# Oe wil address how to wisievize vost Por
ved fevel oP vulput.
و De wil do sv by cow biniey ispoosts wit
عیسو
0 Ore FO
صفحه 49:
مسج م رو
oe Porat
سار سسه سس ۳۳
7
0
a ort bevel.
showy earth ین سس
اس لدم سا رو ied yaad
Tbe or hehe هام on
i ALowever, bok oP kee
ايت بن ae haher
a, tro 4
: ۱
Lebor per voor 1 1 7
Obey FO 0
صفحه 50:
the chang to ۰ (اس)- سود +
(Thier مانب و علاط
oP Coed Lb prince Gy
Oowbrraiva Oe werd to phe
لام ۴و 0
۳۶ هجو تون نی
he higher ات اجه ای
۳
تاه ۳ kbor.
صفحه 51:
Oost ta the Doo Que
8 4soquccts und Isooosts ur the Productiva
ucts
MRTS="4K/ 7) =MBA ip
Slopef isocostline-4K/ L= 1
MR 2
١ ane 7 ‘MP. =
صفحه 52:
Oost ta the Doo Que
وجا وجكلا كدج ای اج Dhe wicikwuw §
ao,
Por a qed vulput wil our
Writtea as?
اج مواد () ©
har oF نو added to the
ال امه whe
pooduciios process will odd oo equivdteut
avout oF pulpal.
Obte SO
صفحه 53:
Oost ta the Doo Que
® Qvuestivd
oP w= $00, r = $2, und OP, =
One UWhick ioput would the producer
use wore oP? Dky?
0 Obte SO
صفحه 54:
The GPPect oP لاس6۳۳۲
Cees va Pins’ Input وا
® inns that hove uo bp-produnt to procuction
produce oa ef Afued.
® Qo eh Rhedt Pee is u per-unit Pee thot Pixos
Bow woud u producer respodd to oo
ی 0
صفحه 55:
The GPPect oP لاس6۳۳۲
Cees va Pins’ Input وا
© Phe Grew: Steel Producer
0) ۱
©) COO inposes u per voit ePPhuedt
Pee to reduce the euviroevedtaly ام
ام
0 Obte SS
صفحه 56:
The GPPect oP لاس6۳۳۲
Cees va Pins’ Input وا
© Phe Grew: Steel Producer
SNe hota ی ee reece
0 Obte SO
صفحه 57:
ت۳۵ _0,00RS,00D1E,00060,000 98,000 .و
Oko? Ore SP
صفحه 58:
صا فليم حا بجنا
صفحه 59:
The GPPect oP لاس6۳۳۲
Cees va Pins’ Input وا
9 Observetiow:
© Vke wore Posi Pavtors coo be substituted, the
eb Pht.
© Phe oredr the deqrer oP substitutes, the less
the Pires wil have to poy (Por exaple:
$60 ,OOO wik cowbicaiva @ instead oF
$400 OOO wik voevbicratioa P)
0 Obte SO
صفحه 60:
Oost ta the Doo Que
® Oost wiokvizdtiod witk Ourpieg Output
bevels
©» )3 خن ها ند ام موس وب
vost voswbicaives oF وود ued capital ot eal
fevel oF vutput.
0 ۵» 0
صفحه 61:
صفحه 62:
صفحه 63:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
® kot hoppess to wernp posts wheo boty
havieg oe toput thot is vartuble (short nuct)?
ی 0
صفحه 64:
صفحه 65:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
a جور :© )مورا Cost (L®C)
® Cocstodt Returcs ty Grote
°F ioput is doubled, mutput will double ood
wenn ost is boosted of uf levels oP putput.
0 لب OS
صفحه 66:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
a جور :© )مورا Cost (L®C)
24 piu (Returas ty Gout
» |] iaput is doubled, muiput wil wore tho
double ced weroye cost decreuses ot ll
levels ان ان
ی 0
صفحه 67:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
a جور :© )مورا Cost (L®C)
© )]( بمو جدود Retuces to Ooo
۰ طا الجايص جز تحاران چا نز
عه ل 0
صفحه 68:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
a جور :© )مورا Cost (L®C)
© تما با وا
۰ له رم و ور
رتسول retuces to sodte wed therefore
loo were cost is “(D” skaped.
0 Oke OO
صفحه 69:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
® LoorRua @verage Cust (OC)
© Loop sordicd post beards foot were
vost:
*IF LOC <LO@C, LOC wil Pal
*IF LOC > LO, LOC wil rise
* DkerePore, LOC = LO at the wisi
ve LOC
0 Obte OS
صفحه 70:
۱۳ @verage
لمن Oarqical Ovst
(Sper wt
oP ove
0 Ode TO
صفحه 71:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
٩ ) موی
مرها مورا مار با عز با() و
مایب أومج أمجتسوجه مصموط ood اجه رون
۱
0 ۷» 0
صفحه 72:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
® Coowwies unl Diserowwies oP Soule
مین و oP Orue
رما in vuiput is qreuer thad the
۳79 ۲ ۳
اه هرمز و
جز وم لا ما حووا عا تن وا موسرم
inputs.
0 Oke TO
صفحه 73:
Oe TS
=%Ain wa Pow 1% iooreuse
حون میس
GhortRua Oust Curves
a Oeusurtay Erowwies oP Goue
G& =Cost - vulput نله
اون دز
صفحه 74:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
® Qecsuriny Coowwies oP Ooute
Oko? Otte TH
صفحه 75:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
" DherePore, the Pollo wiery ig true:
:ا > رع و 00 > 00
خآم وجاروجوومجب كواجدج وجل وله اوه مسر «
مجك
00 - 00 :0 درع ۰
oP sou و أكداوكمج جامصلها أومد جص :8) +
60 < 00 :ل دري ٠
اه سس مهو ول اوه مسر ۰
sole
0 Oe 7S
صفحه 76:
Lowp-Ruc Orrsus
Gkort-Rua Cost Curves
5 ۲ Retaicaship مووررنو) Skort-Ruc له
Loeg-Rua Cost
© De wil use skort od foxes cost 7
0 Ore TO
صفحه 77:
Ooxstcat Returcs to Gru
Over Ok wary phos stare ws OBO = $ID
($ per wot fe LOO = LOO wed b a otro عط
oP opt
600۰ ۵00۰
900 ۵00, ۵00۰
4 “BC =
۱ ۱ ۱ 00
1 1 1
1 1 1
1 1 1
1 1 1
1 1 1
1 1 1
1 1 1
1 1 1
1 1 1
9 9 9
Okey? Chk PP
صفحه 78:
۱۳ Cost wits
Cossteat Qeturcs ty Gru
® Observaiva
© من با ploot size wil depesd oo the coticipoted:
vuiput (ey. Qy choose GBO,,ev).
© Phe looprus wera cost curve ts the euvebpe oP the
Pirsn’s short-ros wenn cost purves.
® Qcesiiva
© Okot would hopped to were ost Poo cutput level
viker thaw thot shouse is choseo?
0 ۵ TO
صفحه 79:
و
stent owe br ord os
/ ۵0, لحب 600 59.
ent © w abe LOO bere 90۹ كبر
one pd Pore سان ال
pean
Oke TS
صفحه 80:
۱۳ Cost wits
Cossteat Qeturcs ty Gru
® Oket is the Pins’ roger post poe?
® Pines coo chong sod to choo vulput to the
روا
© باط حابصل دكلا جا مه اه متا با
portiva oF the GOO ارب رصی represeuis
the wiokwud cost Por coy fevel oP output.
0 Ore OO
صفحه 81:
۱۳ Cost wits
Cossteat Qeturcs ty Gru
© Observetiogs
۰ ۱ LOC does uot tuchide the wioiue points
® LOO ts wt the euvelope متمد وماك جا حاص
wargicdl post. Dky ut?
0 9۷» 0
صفحه 82:
@roductiod wit Two
رولب oP Goppe
® Gxanvples:
له سلجم موم نان و
عطصصا له موم زامن و
© Oaversip--Teuchiog ond research
دی 0
صفحه 83:
@roductiod wit Two
رولب oP Goppe
® Coowwies oP svope exist whe the jpiot output oF
usin Pirsy is yreuter thea the vutput thot oould be
uohieved by tu محص ةنال Pins euck produciog a
ان ارزو
posposy producto cars ord امه مه تن و
صاصم
0 Ore OS
صفحه 84:
@roductiod wit Two
رولب oP Goppe
" Odvookrpes
0) Outs use vupital aed labor.
9( Whe Pirws shore woengeweut
155715.
9( otk vee the save bobor chile ood
0 Oe OF
صفحه 85:
@roductiod wit Two
رولب oP Goppe
® Produniion:
Cirws wost choose how work oP eck to و
produce.
tercaive quencies coo be thustroted usiccy با و
poodut trocsPorwelive murves.
0 Ore OS
صفحه 86:
صفحه 87:
@roductiod wit Two
رولب oP Goppe
© Observetiogs
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sloped
retuces Exist io this excacvple رل و
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صفحه 88:
@roductiod wit Two
رولب oP Goppe
© Observetiogs
© Dhere is w direct rehtioeship bettered
و DP sovpe wed epouwies oP soul.
* Duy expericuve exo wwwies oP svppe und
disepowwies oP svule
* Ou hwe eoouwwies oP soul ond unt hove
مه اه ور
0 Okt 66
صفحه 89:
@roductiod wit Two
رولب oP Goppe
۱ ۱ deyer of ies DP scope WEIS
the sovicgs ia post ood coo be writes
scat AQ)- AQ.@)
00
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© CQ) & he vst oP producing Q,
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0 Ore 9
صفحه 90:
@roductiod wit Two
رولب oP Goppe
a هه
© GC > O -- Crowwies oP scope
eR GC < O -- Oserrwmies oP soope
0 ۵» OD
صفحه 91:
Coowwes oP Goope
fo the Trucktay Techusiry
«# /| عص جد
© Druid versus tess thon truck bod
© Direct versus intent routicry
© Leah oP bout
0 Oke Od
صفحه 92:
277 ۰۳ 6
fo the Trucktay Techusiry
® Qvesiivg:
و Coowwies vP Grule
* Ore harge-svule, direct hauls cheaper ocd
trucks?
وه مت رل Ore there ovst *
وان تسه امه botk direvt
0 Obte SS
صفحه 93:
277 ۰۳ 6
fo the Trucktay Techusiry
® Ewpiriod Piacoa
© Oa جور ادحه oP OS truckiagy Pirws exaviced
Pour cistioct mutputs.
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ما ام کات عنم سم
* Loo hous wit partial خلوصا
ods wilt total brads
و ی 0
صفحه 94:
277 ۰۳ 6
fo the Trucktay Techusiry
۱ Cxopiricd Picdigs
© Results
۰ 66 < 9۶29 Por ها امس Pir
* GC = O.OE Por very barge Pires
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صفحه 95:
5 م0۲ م0
Costs--The bearccry Ourve
8 OD ke ووس poe weusures the او
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ی 0
صفحه 96:
The bearing Qurve
اه مسا
و
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5
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صفحه 97:
The bearing Qurve
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1
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6
0 Ore O?
صفحه 98:
QOpxenvic Choacges ta
Costs--The bearccry Ourve
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the relaiivaship:
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0 Ore SO
صفحه 99:
5 م0۲ م0
Costs--The bearccry Ourve
ا
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ان خاص الى produce the Pirst
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0 Obte SO
صفحه 100:
5 م0۲ م0
Costs--The bearccry Ourve
" If 6B > OandNincrease:
۱ O, ond @ repressed wiciwurr hbo
رما ان اه تن اه نموه kes tokeo place.
اه بسا میب 3۲99 و۱
0 9» 0
صفحه 101:
The bearing Qurve
ows oP kbor
per wackice bt
سح لجفه سعلسمه فطل
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between he kp required od
cine Kd required, سم
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0 9 سب
صفحه 102:
5 م0۲ م0
Costs--The bearccry Ourve
جمسصامس سدور 0 "
0) QOew Firs wuy expeneure توا
puve, wl eoouwwies ve sue.
0 Oe IOC
صفحه 103:
Goowwes oF
Goede Orrsus Leurciry
(Srv
oP pu)
صفحه 104:
he bobo بلس
Requreweds oP Productay ¢ Given Ouput
Our Per-Ora Labor Request ‘ord bebo ععلسه
(a) Por wack 10 vat oP Oupu (L) Reqecwrd
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90 20 86.0 (0.0 + 7.0)
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صفحه 105:
5 م0۲ م0
Costs--The bearccry Ourve
© تام عرص جوا با
0) Dke hbor .للك سم اه پچ
Sc) Oosts will be high ot Pirst cord thea will Pall
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0 2»
صفحه 106:
Dee Leary Que ta Practice
مرن ۰
© )85 مصوذا ريرصه the chewird procession indusiry.
# Op they:
0) Croduce تدوج خات أعنصا بيصا د ood sett ot
a kicks price?
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ata baw price?
0 2»
صفحه 107:
Dee Leary Que ta Practice
Bow would the fearon Gorve inPhueue
0 Oke IO?
صفحه 108:
Dee Leary Que ta Practice
® Dke Cxopiricd عولد
© Grady oP O°? سم products
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vost oF procuctica Puls by OP %
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ماه روا
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صفحه 109:
Dee Leary Que ta Practice
# Otker Cuopiricd Picco
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صفحه 110:
Dee Leary Que ta Practice
a Opplicry ویر Curves
Do deterxniae PF it is proPituble to الك
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صفحه 111:
3 Col
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صفحه 112:
Tort Cost Curve
Por te @utowvbie Tedustry
سل
جهن (و رد6
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صفحه 113:
Cstrevattacy cd Prediciiccy Oost
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صفحه 114:
Cstrevattacy cd Prediciiccy Oost
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صفحه 115:
Cstrevattacy cd Prediciiccy Oost
BB the woried post curve is ut fueur, we
wight use u cubic vost Poovtion:
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صفحه 116:
Oost varia سین
($ per veal) 00 - 6ر2 + م + 37
۴+ ر+معووه
(per toe pore)
0 Oke 0
صفحه 117:
Cstrevattacy cd Prediciiccy Oost
® OP Picuties io Oeusuricgy Cust
0) Output data way represeot od جل ره
oP diPPerect type oP products.
S) Cost dott wap wt ihe opportunity
vost.
(۹ vost to 0 particular proctuct
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صفحه 118:
Cstrevattacy cd Prediciiccy Oost
© Cost Pucniives ond the Deusuwrewedt oP Grote
Coowwies
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صفحه 119:
Cost Puartiogs Por Cleviric Power
Gode Coowwes to he نیوا Power Tedustry
Ovtput (sollica huts) €9 999 4009 ۰ ۰ 589 9
۶و عون 601, 999 ۰.0 9 6 0 OP
»۳ج 0
صفحه 120:
Qvernge Ovst oP Produciiva
to the Gleviric Power Terdhustry
Ovst
(hte (DOO heck)
99
80
660 6
وه
صفحه 121:
Cost @uactiows Por Cleviric Power
" iodine
اج و شین و
* Ont due to وه oP sve
*Ous vouwsed by:
* Lower input vost (cool & vil)
۱ in techovlogy
0 Ob 40
صفحه 122:
) ملسمی؟) بوول ۳ the
Goins ved bood Tedusiry
® Dke اه موه انش foot post
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oF the saviegs ood foo iodusiny fo the woke
oF the suvicgs ocd foo oolopse io the
09600.
0 Oke IOC
صفحه 123:
) ملسمی؟) بوول ۳ the
Goins ved bood Tedusiry
® Duan Por OO مها لت مرو Por
1917289 86 191729 in six Western states
© Q = totd uses oP eack G&L
® LOO = wenn سوه ره
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perceutaye oP total assets.
0 Oke IOS
صفحه 124:
) ملسمی؟) بوول ۳ the
)© جددنا لحجه عجارو Terhstry
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© Dinko bop wera cost reaches its pit
oP the saviegs ued roo reuck $SPE wil.
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صفحه 125:
) ملسمی؟) بوول ۳ the
Goins ved bood Tedusiry
® مسر vperuiny expeues ure 0.00%
oF total assets.
® @kovst af oP the مرو ocd boos in the
reqioe being studied kad substoctidly lees
thor $S PE وز لت assets.
0 Oke IOS:
صفحه 126:
) ملسمی؟) بوول ۳ the
Goins ved bood Tedusiry
® Qvuestives
0) Oket are the ioplicativas ان the
these repults?
0 Oke IO
صفحه 127:
060
8 )( ضبن investors, wid epourwists wust
foke isto اج راومه لا مومت
ussuvtoted with the use oP the Pirn’s
۲ 0
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۱ ۱ مد كاك
0 Oke 16?
صفحه 128:
060
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the short nn, the preseuve vf dicvinishicgy
retuces detersvives the shape oP the vost
DIVES.
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۱ proves ure voriuble.
سب
8 Oke 160
صفحه 129:
060
| Pircn’s expoosiod po desoribes kow
its وی نو راو اج Vary us the
sole pr vulput oP its pperciva دوه
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euwelppe oF the short-nue were post
DWVES.
0 Oke IOS
صفحه 130:
060
© 0 ان موس وروی رم sode whe if
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vost.
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لافيت 0
صفحه 131:
060
© و مط و اه اوه ورن ور(
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0 Oke 40
صفحه 132:
Gud oP Chapter 0
Tre Cost oF
Produtos
Chapter 7
The Cost of
Production
Topics to be Discussed
Measuring Cost: Which Costs Matter?
Cost in the Short Run
Cost in the Long Run
Long-Run Versus Short-Run Cost
Curves
Chapter 7
Slide 2
Topics to be Discussed
Production with Two Outputs--Economies
of Scope
Dynamic Changes in Costs--The Learning
Curve
Estimating and Predicting Cost
Chapter 7
Slide 3
Introduction
The production technology measures the
relationship between input and output.
Given the production technology, managers
must choose how to produce.
Chapter 7
Slide 4
Introduction
To determine the optimal level of output and
the input combinations, we must convert
from the unit measurements of the
production technology to dollar
measurements or costs.
Chapter 7
Slide 5
Measuring Cost:
Which Costs Matter?
Economic
Economic Cost
Cost vs.
vs. Accounting
Accounting Cost
Cost
Accounting Cost
Actual
expenses plus depreciation charges for
capital equipment
Economic Cost
Cost
to a firm of utilizing economic resources
in production, including opportunity cost
Chapter 7
Slide 6
Measuring Cost:
Which Costs Matter?
Opportunity cost.
Cost
associated with opportunities that are
foregone when a firm’s resources are not put
to their highest-value use.
Chapter 7
Slide 7
Measuring Cost:
Which Costs Matter?
An Example
A
firm owns its own building and pays no rent
for office space
Does
this mean the cost of office space is
zero?
Chapter 7
Slide 8
Measuring Cost:
Which Costs Matter?
Sunk Cost
Expenditure
that has been made and cannot be
recovered
Should
Chapter 7
not influence a firm’s decisions.
Slide 9
Measuring Cost:
Which Costs Matter?
An Example
A
firm pays $500,000 for an option to buy a
building.
The
cost of the building is $5 million or a total of
$5.5 million.
The
firm finds another building for $5.25 million.
Which
Chapter 7
building should the firm buy?
Slide 10
Choosing the Location
for a New Law School Building
Northwestern University Law School
1) Current location in downtown
Chicago
2) Alternative location in Evanston
with the main campus
Chapter 7
Slide 11
Choosing the Location
for a New Law School Building
Northwestern University Law School
3)
Chapter 7
Choosing a Site
Land owned in Chicago
Must purchase land in Evanston
Chicago location might appear cheaper
without considering the opportunity cost of the
downtown land (i.e. what it could be sold
for)
Slide 12
Choosing the Location
for a New Law School Building
Northwestern University Law School
3)
Chapter 7
Choosing a Site
Chicago location chosen--very costly
Justified only if there is some intrinsic values
associated with being in Chicago
If not, it was an inefficient decision if it was
based on the assumption that the downtown
land was “free”
Slide 13
Measuring Cost:
Which Costs Matter?
Fixed
Fixed and
and Variable
Variable Costs
Costs
Total output is a function of variable inputs
and fixed inputs.
Therefore, the total cost of production
equals the fixed cost (the cost of the fixed
inputs) plus the variable cost (the cost of the
variable inputs), or…
TCFC VC
Chapter 7
Slide 14
Measuring Cost:
Which Costs Matter?
Fixed
Fixed and
and Variable
Variable Costs
Costs
Fixed Cost
Does
not vary with the level of output
Variable Cost
Cost
Chapter 7
that varies as output varies
Slide 15
Measuring Cost:
Which Costs Matter?
Fixed Cost
Cost
paid by a firm that is in business
regardless of the level of output
Sunk Cost
Cost
that have been incurred and cannot be
recovered
Chapter 7
Slide 16
Measuring Cost:
Which Costs Matter?
Personal
Computers: most costs are
variable
Components,
Software:
Cost
Chapter 7
labor
most costs are sunk
of developing the software
Slide 17
Measuring Cost:
Which Costs Matter?
Pizza
Largest
Chapter 7
cost component is fixed
Slide 18
A Firm’s Short-Run Costs ($)
Rate of
Output
Fixed
Cost
(FC)
050 0
150 50
250 78
350 98
450 112
550 130
650 150
750 175
850 204
950 242
1050 300
1150 385
Variable
Cost
(VC)
Total
Cost
(TC)
Marginal
Cost
(MC)
50---------10050 5050 100
12828 2539 64
14820 16.732.749.3
16214 12.528 40.5
18018
1026 36
20020 8.325 33.3
22525
7.125 32.1
25429 6.325.531.8
29238 5.626.932.4
35058
530 35
43585 4.535 39.5
Average
Fixed
Cost
(AFC)
Average
Variable
Cost
(AVC)
Average
Total
Cost
(ATC)
Cost in the Short Run
Marginal Cost (MC) is the cost of
expanding output by one unit. Since fixed
cost have no impact on marginal cost, it can
be written as:
VC TC
MC
Q
Q
Chapter 7
Slide 20
Cost in the Short Run
Average Total Cost (ATC) is the cost per
unit of output, or average fixed cost
(AFC) plus average variable cost
(AVC). This can be written:
TFC TVC
ATC
Q
Q
Chapter 7
Slide 21
Cost in the Short Run
Average Total Cost (ATC) is the cost per
unit of output, or average fixed cost
(AFC) plus average variable cost
(AVC). This can be written:
TC
ATC AFC AVC or
Q
Chapter 7
Slide 22
Cost in the Short Run
The Determinants of Short-Run Cost
The
relationship between the production
function and cost can be exemplified by either
increasing returns and cost or decreasing
returns and cost.
Chapter 7
Slide 23
Cost in the Short Run
The Determinants of Short-Run Cost
Increasing
returns and cost
With
increasing returns, output is increasing relative
to input and variable cost and total cost will fall relative
to output.
Decreasing
returns and cost
With
decreasing returns, output is decreasing
relative to input and variable cost and total cost will
rise relative to output.
Chapter 7
Slide 24
Cost in the Short Run
For Example: Assume the wage rate (w)
is fixed relative to the number of workers
hired. Then:
VC
MC
Q
VC wL
Chapter 7
Slide 25
Cost in the Short Run
Continuing:
VC wL
wL
MC
Q
Chapter 7
Slide 26
Cost in the Short Run
Continuing:
Q
MPL
L
L
1
L fora1unitQ
Q MPL
Chapter 7
Slide 27
Cost in the Short Run
In conclusion:
w
MC
MPL
…and a low marginal product (MP) leads
to a high marginal cost (MC) and vise
versa.
Chapter 7
Slide 28
Cost in the Short Run
Consequently (from the table):
MC
0 through 4 units of output
MC
Chapter 7
decreases initially with increasing returns
increases with decreasing returns
5 through 11 units of output
Slide 29
A Firm’s Short-Run Costs ($)
Rate of
Output
Fixed
Cost
(FC)
050 0
150 50
250 78
350 98
450 112
550 130
650 150
750 175
850 204
950 242
1050 300
1150 385
Variable
Cost
(VC)
Total
Cost
(TC)
Marginal
Cost
(MC)
50---------10050 5050 100
12828 2539 64
14820 16.732.749.3
16214 12.528 40.5
18018
1026 36
20020 8.325 33.3
22525
7.125 32.1
25429 6.325.531.8
29238 5.626.932.4
35058
530 35
43585 4.535 39.5
Average
Fixed
Cost
(AFC)
Average
Variable
Cost
(AVC)
Average
Total
Cost
(ATC)
Cost Curves for a Firm
Total cost
is the vertical
sum of FC
and VC.
Cost 400
($ per
year)
TC
VC
Variable cost
increases with
production and
the rate varies with
increasing &
decreasing returns.
300
200
Fixed cost does not
vary with output
100
FC
50
0
Chapter 7
1
2
3
4
5
6
7
8
9
10
11
12
13
Slide 31
Output
Cost Curves for a Firm
Cost
($ per
unit)
100
MC
75
50
ATC
AVC
25
AFC
0
Chapter 7
1
2
3
4
5
6
7
8
9
10
11
Output (units/yr.)
Slide 32
Cost Curves for a Firm
The line drawn from
the origin to the tangent of
the variable cost curve:
Its slope equals AVC
The slope of a point on
VC equals MC
Therefore, MC =
AVC at 7 units of
output (point A)
TC
P
400
VC
300
200
A
100
0
F
C
1 2 3 4 5 6 7 8 9 10
11
12 13
Output
Chapter 7
Slide 33
Cost Curves for a Firm
Unit Costs
AFC
falls continuously
When
MC < AVC or
MC < ATC, AVC &
ATC decrease
When
MC > AVC or
MC > ATC, AVC &
ATC increase
Cost
($ per
unit)
100
MC
75
50
ATC
AVC
25
AFC
0
1
2
3
4
5
6
7
8
9
10
11
Output (units/yr.)
Chapter 7
Slide 34
Cost Curves for a Firm
Unit Costs
MC
= AVC and
ATC at minimum
AVC and ATC
Minimum
AVC occurs
at a lower output than
minimum ATC due to
FC
Cost
($ per
unit)
100
MC
75
50
ATC
AVC
25
AFC
0
1
2
3
4
5
6
7
8
9
10
11
Output (units/yr.)
Chapter 7
Slide 35
Operating Costs for Aluminum Smelting ($/Ton
- based on an output of 600 tons/day)
Variable costs that are constant at all output levels
Electricity
Alumina
Other raw materials
Plant power and fuel
Subtotal
Chapter 7
$316
369
125
10
$820
Slide 36
Operating Costs for Aluminum Smelting ($/Ton
- based on an output of 600 tons/day)
Variable costs that increase when output exceeds 600 tons/day
Chapter 7
Labor
Maintenance
Freight
Subtotal
$150
120
50
$320
Total operating costs
$1140
Slide 37
The Short-Run Variable
Costs of Aluminum Smelting
Cost
($ per ton)
1300
MC
1200
1140
AVC
1100
300
Chapter 7
600
900
Output (tons/day)
Slide 38
Cost in the Long Run
The
The User
User Cost
Cost of
of Capital
Capital
User Cost of Capital = Economic
Depreciation + (Interest Rate)(Value of
Capital)
Chapter 7
Slide 39
Cost in the Long Run
The
The User
User Cost
Cost of
of Capital
Capital
Example
Delta
buys a Boeing 737 for $150 million
with an expected life of 30 years
Chapter 7
Annual economic depreciation = $150
million/30 = $5 million
Interest rate = 10%
Slide 40
Cost in the Long Run
The
The User
User Cost
Cost of
of Capital
Capital
Example
User
Cost of Capital = $5 million + (.10)
($150 million – depreciation)
Chapter 7
Year 1 = $5 million +
(.10)
($150 million) = $20 million
Year 10 = $5 million +
($100 million) = $15 million
(.10)
Slide 41
Cost in the Long Run
The
The User
User Cost
Cost of
of Capital
Capital
Rate per dollar of capital
r
Chapter 7
= Depreciation Rate + Interest Rate
Slide 42
Cost in the Long Run
The
The User
User Cost
Cost of
of Capital
Capital
Airline Example
Depreciation
Rate
Rate = 1/30 = 3.33/yr
of Return = 10%/yr
User Cost of Capital
r
Chapter 7
= 3.33 + 10 = 13.33%/yr
Slide 43
Cost in the Long Run
The
The Cost
Cost Minimizing
Minimizing Input
Input Choice
Choice
Assumptions
Two
Inputs: Labor (L) & capital (K)
Price
of labor: wage rate (w)
The
Chapter 7
price of capital
R = depreciation rate + interest rate
Slide 44
Cost in the Long Run
The
The
Cost
Cost
Input
The
TheUser
User
Cost Minimizing
Minimizing
Cost of
of Capital
Capital
Input Choice
Choice
Question
If
capital was rented, would it change the value
of r ?
Chapter 7
Slide 45
Cost in the Long Run
The
The
Cost
Cost
Input
The
TheUser
User
Cost Minimizing
Minimizing
Cost of
of Capital
Capital
Input Choice
Choice
The Isocost Line
C
= wL + rK
A line showing all combinations of L &
K that can be purchased for the same cost
Isocost:
Chapter 7
Slide 46
Cost in the Long Run
The
The Isocost
Isocost Line
Line
Rewriting C as linear:
K
= C/r - (w/r)L
Slope
Chapter 7
of the isocost:
K
L
r
w
is the ratio of the wage rate to rental cost of capital.
This shows the rate at which capital can be
substituted for labor with no change in cost.
Slide 47
Choosing Inputs
We will address how to minimize cost for a
given level of output.
We
will do so by combining isocosts with
isoquants
Chapter 7
Slide 48
Producing a Given
Output at Minimum Cost
Capital
per
year
Q1 is an isoquant
for output Q1.
Isocost curve C0 shows
all combinations of K and L
that can produce Q1 at this
cost level.
K2
Isocost C2 shows quantity
Q1 can be produced with
combination K2L2 or K3L3.
However, both of these
are higher cost combinations
than K1L1.
CO C1 C2 are
three
isocost lines
A
K1
Q1
K3
C0
L2
Chapter 7
L1
C1
L3
C2
Labor per year
Slide 49
Input Substitution When
an Input Price Change
Capital
per
year
K2
If the price of labor
changes, the isocost curve
becomes steeper due to
the change in the slope -(w/L).
This yields a new combination
of K and L to produce Q1.
Combination B is used in place
of combination A.
The new combination represents
the higher cost of labor relative
to capital and therefore capital
is substituted for labor.
B
A
K1
Q1
C2
L2
Chapter 7
L1
C1
Labor per year
Slide 50
Cost in the Long Run
Isoquants and Isocosts and the Production
Function
MRTS- K
L
MPL
Slopeof isocostlineK
MP
and L
Chapter 7
MPK
w
L
r
w
MPK
r
Slide 51
Cost in the Long Run
The minimum cost combination can then be
written as:
MPL
w
MPK
r
Minimum
cost for a given output will occur
when each dollar of input added to the
production process will add an equivalent
amount of output.
Chapter 7
Slide 52
Cost in the Long Run
Question
If
w = $10, r = $2, and MPL =
MPK, which input would the producer
use more of? Why?
Chapter 7
Slide 53
The Effect of Effluent
Fees on Firms’ Input Choices
Firms that have a by-product to production
produce an effluent.
An effluent fee is a per-unit fee that firms
must pay for the effluent that they emit.
How would a producer respond to an
effluent fee on production?
Chapter 7
Slide 54
The Effect of Effluent
Fees on Firms’ Input Choices
The Scenario: Steel Producer
1)
Located on a river: Low cost
transportation and emission disposal
(effluent).
2) EPA imposes a per unit effluent
fee to reduce the environmentally harmful
effluent.
Chapter 7
Slide 55
The Effect of Effluent
Fees on Firms’ Input Choices
The Scenario: Steel Producer
3)
Chapter 7
How should the firm respond?
Slide 56
The Cost-Minimizing
Response to an Effluent Fee
Capital
(machine
hours per
month)
5,000
Slope of
isocost = -10/40
= -0.25
4,000
3,000
A
2,000
1,000
0
Chapter 7
Output of 2,000
Tons of Steel per Month
5,000
10,00012,00018,00020,000
Waste Water
(gal./month)
Slide 57
The Cost-Minimizing
Response to an Effluent Fee
Capital
(machine
hours per
month)
Slope of
isocost = -20/40
= -0.50
5,000
F
4,000
3,500
Prior to regulation the
firm chooses to produce
an output using 10,000
gallons of water and 2,000
machine-hours of capital at A.
Following the imposition
of the effluent fee of $10/gallon
the slope of the isocost changes
which the higher cost of water to
capital so now combination B
is selected.
B
3,000
A
2,000
1,000
E
0
Chapter 7
5,000
C
10,00012,00018,00020,000
Output of 2,000
Tons of Steel per Month
Waste Water
(gal./month)
Slide 58
The Effect of Effluent
Fees on Firms’ Input Choices
Observations:
The
more easily factors can be substituted, the
more effective the fee is in reducing the
effluent.
The
greater the degree of substitutes, the less
the firm will have to pay (for example:
$50,000 with combination B instead of
$100,000 with combination A)
Chapter 7
Slide 59
Cost in the Long Run
Cost minimization with Varying Output
Levels
A
firm’s expansion path shows the minimum
cost combinations of labor and capital at each
level of output.
Chapter 7
Slide 60
A Firm’s Expansion Path
Capital
per
year
The expansion path illustrates
the least-cost combinations of
labor and capital that can be
used to produce each level of
output in the long-run.
15 $3000 Isocost Line
0
Expansion Path
$2000
Isocost Line
10
0
C
7
5
5
0
B
300 Unit Isoquant
A
2
5
Chapter 7
200 Unit
Isoquant
5
0
100
15
0
20
0
30
0
Labor per year
Slide 61
A Firm’s Long-Run Total Cost Curve
Cost
per
Year
Expansion Path
F
300
0
E
200
0
100
0
D
100
Chapter 7
20
0
30
0
Output, Units/yr
Slide 62
Long-Run Versus
Short-Run Cost Curves
What happens to average costs when both
inputs are variable (long run) versus only
having one input that is variable (short run)?
Chapter 7
Slide 63
The Inflexibility of
Short-Run Production
Capital
per
year
E
The long-run expansion
path is drawn as before..
C
Long-Run
Expansion Path
A
K2
P
K1
Short-Run
Expansion Path
Q2
Q1
L1
Chapter 7
L2
B
L3 D
F
Labor per year
Slide 64
Long-Run Versus
Short-Run Cost Curves
Long-Run Average Cost (LAC)
Constant
Chapter 7
Returns to Scale
If input is doubled, output will double and
average cost is constant at all levels of output.
Slide 65
Long-Run Versus
Short-Run Cost Curves
Long-Run Average Cost (LAC)
Increasing
Chapter 7
Returns to Scale
If input is doubled, output will more than
double and average cost decreases at all
levels of output.
Slide 66
Long-Run Versus
Short-Run Cost Curves
Long-Run Average Cost (LAC)
Decreasing
Chapter 7
Returns to Scale
If input is doubled, the increase in output is
less than twice as large and average cost
increases with output.
Slide 67
Long-Run Versus
Short-Run Cost Curves
Long-Run Average Cost (LAC)
In
Chapter 7
the long-run:
Firms experience increasing and
decreasing returns to scale and therefore
long-run average cost is “U” shaped.
Slide 68
Long-Run Versus
Short-Run Cost Curves
Long-Run Average Cost (LAC)
Long-run
marginal cost leads long-run average
cost:
Chapter 7
If LMC < LAC, LAC will fall
If LMC > LAC, LAC will rise
Therefore, LMC = LAC at the minimum
of LAC
Slide 69
Long-Run Average
and Marginal Cost
Cost
($ per unit
of output
LMC
LAC
A
Output
Chapter 7
Slide 70
Long-Run Versus
Short-Run Cost Curves
Question
What
is the relationship between long-run
average cost and long-run marginal cost when
long-run average cost is constant?
Chapter 7
Slide 71
Long-Run Versus
Short-Run Cost Curves
Economies and Diseconomies of Scale
Economies
of Scale
Increase in output is greater than the
increase in inputs.
Diseconomies
Chapter 7
of Scale
Increase in output is less than the increase in
inputs.
Slide 72
Long-Run Versus
Short-Run Cost Curves
Measuring Economies of Scale
Ec Cost output elasticity
%Δ in cost from a 1% increase
in output
Chapter 7
Slide 73
Long-Run Versus
Short-Run Cost Curves
Measuring Economies of Scale
Ec (C / C) /(Q / Q)
Ec (C / Q) /(C / Q) MC/AC
Chapter 7
Slide 74
Long-Run Versus
Short-Run Cost Curves
Therefore, the following is true:
E
C
E
C
< 1: MC < AC
Average cost indicate decreasing economies of
scale
= 1: MC = AC
Average cost indicate constant economies of scale
E
> 1: MC > AC
Average cost indicate increasing diseconomies of
scale
C
Chapter 7
Slide 75
Long-Run Versus
Short-Run Cost Curves
The Relationship Between Short-Run and
Long-Run Cost
We
will use short and long-run cost to
determine the optimal plant size
Chapter 7
Slide 76
Long-Run Cost with
Constant Returns to Scale
Cost
($ per unit
of output
With many plant sizes with SAC = $10
the LAC = LMC and is a straight line
SAC1
SAC2
SMC1
SMC2
SAC3
SMC3
LAC =
LMC
Q1
Chapter 7
Q2
Q3
Output
Slide 77
Long-Run Cost with
Constant Returns to Scale
Observation
The
optimal plant size will depend on the anticipated
output (e.g. Q1 choose SAC1,etc).
long-run average cost curve is the envelope of the
firm’s short-run average cost curves.
The
Question
What
would happen to average cost if an output level
other than that shown is chosen?
Chapter 7
Slide 78
Long-Run Cost with Economies
and Diseconomies of Scale
Cost
($ per unit
of output
SAC1
SAC3
SAC2
A
$10
$8
B
SMC1
SMC3
LMC
SMC2
Q1
Chapter 7
LAC
If the output is Q1 a manager
would chose the small plant
SAC1 and SAC $8.
Point B is on the LAC because
it is a least cost plant for a
given output.
Output
Slide 79
Long-Run Cost with
Constant Returns to Scale
What is the firms’ long-run cost curve?
Firms
can change scale to change output in the
long-run.
The
long-run cost curve is the dark blue
portion of the SAC curve which represents
the minimum cost for any level of output.
Chapter 7
Slide 80
Long-Run Cost with
Constant Returns to Scale
Observations
The
LAC does not include the minimum points
of small and large size plants? Why not?
LMC
is not the envelope of the short-run
marginal cost. Why not?
Chapter 7
Slide 81
Production with Two
Outputs--Economies of Scope
Examples:
Chicken
farm--poultry and eggs
Automobile
company--cars and trucks
University--Teaching
Chapter 7
and research
Slide 82
Production with Two
Outputs--Economies of Scope
Economies of scope exist when the joint output of
a single firm is greater than the output that could be
achieved by two different firms each producing a
single output.
What are the advantages of joint production?
Consider
tractors
Chapter 7
an automobile company producing cars and
Slide 83
Production with Two
Outputs--Economies of Scope
Advantages
1)
Both use capital and labor.
2) The firms share management
resources.
3) Both use the same labor skills and
type of machinery.
Chapter 7
Slide 84
Production with Two
Outputs--Economies of Scope
Production:
Firms
must choose how much of each to
produce.
The
alternative quantities can be illustrated using
product transformation curves.
Chapter 7
Slide 85
Product Transformation Curve
Each curve shows
combinations of output
with a given combination
of L & K.
Number
of tractors
O2
O1
O1 illustrates a low level
of output. O2 illustrates
a higher level of output with
two times as much labor
and capital.
Number of cars
Chapter 7
Slide 86
Production with Two
Outputs--Economies of Scope
Observations
Product
transformation curves are negatively
sloped
Constant
returns exist in this example
Since
the production transformation curve is
concave is joint production desirable?
Chapter 7
Slide 87
Production with Two
Outputs--Economies of Scope
Observations
There
is no direct relationship between
economies of scope and economies of scale.
Chapter 7
May experience economies of scope and
diseconomies of scale
May have economies of scale and not have
economies of scope
Slide 88
Production with Two
Outputs--Economies of Scope
The degree of economies of scope measures
the savings in cost and can be written:
C(Q1) C(Q2) C(Q1, Q2)
SC
C(Q1, Q2)
C(Q
) is the cost of producing Q1
C(Q
) is the cost of producing Q2
C(Q
Q2) is the joint cost of producing both products
1
2
1
Chapter 7
Slide 89
Production with Two
Outputs--Economies of Scope
Interpretation:
If
SC > 0 -- Economies of scope
If
SC < 0 -- Diseconomies of scope
Chapter 7
Slide 90
Economies of Scope
in the Trucking Industry
Issues
Truckload
versus less than truck load
Direct
versus indirect routing
Length
of haul
Chapter 7
Slide 91
Economies of Scope
in the Trucking Industry
Questions:
Economies
Chapter 7
of Scale
Are large-scale, direct hauls cheaper and
more profitable than individual hauls by small
trucks?
Are there cost advantages from operating
both direct and indirect hauls?
Slide 92
Economies of Scope
in the Trucking Industry
Empirical Findings
An
analysis of 105 trucking firms examined
four distinct outputs.
Chapter 7
Short hauls with partial loads
Intermediate hauls with partial loads
Long hauls with partial loads
Hauls with total loads
Slide 93
Economies of Scope
in the Trucking Industry
Empirical Findings
Results
SC = 1.576 for reasonably large firm
SC = 0.104 for very large firms
Interpretation
Chapter 7
Combining partial loads at an intermediate location
lowers cost management difficulties with very large
firms.
Slide 94
Dynamic Changes in
Costs--The Learning Curve
The learning curve measures the impact
of worker’s experience on the costs of
production.
It describes the relationship between a
firm’s cumulative output and amount of
inputs needed to produce a unit of output.
Chapter 7
Slide 95
The Learning Curve
Hours of labor
per machine lot
10
8
6
4
2
0
Chapter 7
10
20
30
40
50
Cumulative number of
machine lots produced
Slide 96
The Learning Curve
The horizontal axis
measures the cumulative
number of hours of
machine tools the firm
has produced
The vertical axis
measures the number
of hours of labor
needed to produce each
lot.
Hours of labor
per machine lot
10
8
6
4
2
0
Chapter 7
10
20
30
40
Slide 97
50
Dynamic Changes in
Costs--The Learning Curve
The learning curve in the figure is based on
the relationship:
L BN
N cumulative
unitsof output
produced
L laborinputperunitof output
A,B and areconstants
A & B arepositive
and is between
0 and1
Chapter 7
Slide 98
Dynamic Changes in
Costs--The Learning Curve
If N 1:
L
equals A + B and this measures labor input to
produce the first unit of output
If 0:
Labor
input remains constant as the cumulative level
of output increases, so there is no learning
Chapter 7
Slide 99
Dynamic Changes in
Costs--The Learning Curve
If 0 andN increases
:
L
approaches A, and A represent minimum labor
input/unit of output after all learning has taken place.
Thelarger
: the learning effect.
more important
The
Chapter 7
Slide 100
The Learning Curve
Hours of labor
per machine lot
The chart shows a sharp drop
in lots to a cumulative amount of
20, then small savings at
higher levels.
10
8
Doubling cumulative output causes
a 20% reduction in the difference
between the input required and
minimum attainable input requirement.
6
4
0.31
2
0
Chapter 7
10
20
30
40
50
Cumulative number of
machine lots produced
Slide 101
Dynamic Changes in
Costs--The Learning Curve
Observations
1) New firms may experience a learning
curve, not economies of scale.
2) Older firms have relatively small gains
from learning.
Chapter 7
Slide 102
Economies of
Scale Versus Learning
Cost
($ per unit
of output)
Economies of Scale
A
B
Learning
C
AC1
AC2
Output
Chapter 7
Slide 103
Predicting the Labor
Requirements of Producing a Given Output
Cumulative Output
(N)
10
20
30
40
50
60
70
80 and over
Per-Unit Labor Requirement
for each 10 units of Output (L)
Total Labor
Requirement
1.00
10.0
.80
18.0 (10.0 + 8.0)
.70
25.0 (18.0 + 7.0)
.64
31.4 (25.0 + 6.4)
.60
37.4 (31.4 + 6.0)
.56
43.0 (37.4 + 5.6)
.53
48.3 (43.0 + 5.3)
.5153.4 (48.3 + 5.1)
Dynamic Changes in
Costs--The Learning Curve
The learning curve implies:
1)
The labor requirement falls per unit.
2) Costs will be high at first and then will
with learning.
fall
3) After 8 years the labor requirement will be
0.51 and per unit cost will be half
what it
was in the first year of production.
Chapter 7
Slide 105
The Learning Curve in Practice
Scenario
A
new firm enters the chemical processing industry.
Do they:
1)
a
2)
at a
Chapter 7
Produce a low level of output and sell at
high price?
Produce a high level of output and sell
low price?
Slide 106
The Learning Curve in Practice
How would the learning curve influence
your decision?
Chapter 7
Slide 107
The Learning Curve in Practice
The Empirical Findings
Study
of 37 chemical products
Average cost fell 5.5% per year
For each doubling of plant size, average production
costs fall by 11%
For each doubling of cumulative output, the average
cost of production falls by 27%
Which is more important, the economies of scale
or learning effects?
Chapter 7
Slide 108
The Learning Curve in Practice
Other Empirical Findings
In
the semi-conductor industry a study of
seven generations of DRAM semiconductors
from 1974-1992 found learning rates
averaged 20%.
In
the aircraft industry the learning rates are as
high as 40%.
Chapter 7
Slide 109
The Learning Curve in Practice
Applying Learning Curves
1) To determine if it is profitable to
enter an industry.
2) To determine when profits will
occur based on plant size and
cumulative output.
Chapter 7
Slide 110
Estimating and Predicting Cost
Estimates of future costs can be obtained
from a cost function, which relates the cost
of production to the level of output and other
variables that the firm can control.
Suppose we wanted to derive the total cost
curve for automobile production.
Chapter 7
Slide 111
Total Cost Curve
for the Automobile Industry
Variable
cost
General Motors
Nissan
Toyota
Honda
Volvo
Ford
Chrysler
Quantity of Cars
Chapter 7
Slide 112
Estimating and Predicting Cost
A linear cost function (does not show the
U-shaped characteristics) might be:
VC Q
The linear cost function is applicable only if
marginal cost is constant.
Marginal
Chapter 7
cost is represented by
.
Slide 113
Estimating and Predicting Cost
If we wish to allow for a U-shaped
average cost curve and a marginal cost that
is not constant, we might use the quadratic
cost function:
2
VC Q Q
Chapter 7
Slide 114
Estimating and Predicting Cost
If the marginal cost curve is not linear, we
might use a cubic cost function:
2
3
VC Q Q Q
Chapter 7
Slide 115
Cubic Cost Function
Cost
($ per unit)
MC 2Q 3Q2
AVC Q Q2
Output
(per time period)
Chapter 7
Slide 116
Estimating and Predicting Cost
Difficulties in Measuring Cost
1)
Output data may represent an
of different type of products.
aggregate
2) Cost data may not include opportunity
cost.
3) Allocating cost to a particular product
may be difficult when there is more than
one product line.
Chapter 7
Slide 117
Estimating and Predicting Cost
Cost Functions and the Measurement of Scale
Economies
Scale
Chapter 7
Economy Index (SCI)
EC = 1, SCI = 0: no economies or
diseconomies of scale
EC > 1, SCI is negative: diseconomies of scale
EC < 1, SCI is positive: economies of scale
Slide 118
Cost Functions for Electric Power
Scale
ScaleEconomies
Economiesininthe
theElectric
ElectricPower
PowerIndustry
Industry
Output (million kwh)
Value of SCI, 1955
Chapter 7
43
.41
338
.26
1109
.16
2226
.10
5819
.04
Slide 119
Average Cost of Production
in the Electric Power Industry
Average
Cost
(dollar/1000 kwh)
6.5
6.0
1955
A
5.5
5.0
1970
6
Chapter 7
12
18
24
30
36
Output (billions of kwh)
Slide 120
Cost Functions for Electric Power
Findings
Decline
in cost
Not due to economies of scale
Was caused by:
Lower input cost (coal & oil)
Improvements in technology
Chapter 7
Slide 121
A Cost Function for the
Savings and Loan Industry
The empirical estimation of a long-run cost
function can be useful in the restructuring
of the savings and loan industry in the wake
of the savings and loan collapse in the
1980s.
Chapter 7
Slide 122
A Cost Function for the
Savings and Loan Industry
Data for 86 savings and loans for
1975 & 1976 in six western states
Q
= total assets of each S&L
LAC
= average operating expense
Q
& TC are measured in hundreds of
millions of dollars
Average
operating cost are measured as a
percentage of total assets.
Chapter 7
Slide 123
A Cost Function for the
Savings and Loan Industry
A quadratic long-run average cost function was
estimated for 1975:
2
LAC 2.38- 0.6153Q
0.0536Q
Minimum long-run average cost reaches its point
of minimum average total cost when total assets
of the savings and loan reach $574 million.
Chapter 7
Slide 124
A Cost Function for the
Savings and Loan Industry
Average operating expenses are 0.61%
of total assets.
Almost all of the savings and loans in the
region being studied had substantially less
than $574 million in assets.
Chapter 7
Slide 125
A Cost Function for the
Savings and Loan Industry
Questions
1) What are the implications of the
analysis for expansion and mergers?
2) What are the limitations of using
these results?
Chapter 7
Slide 126
Summary
Managers, investors, and economists must
take into account the opportunity cost
associated with the use of the firm’s
resources.
Firms are faced with both fixed and
variable costs in the short-run.
Chapter 7
Slide 127
Summary
When there is a single variable input, as in
the short run, the presence of diminishing
returns determines the shape of the cost
curves.
In the long run, all inputs to the production
process are variable.
Chapter 7
Slide 128
Summary
The firm’s expansion path describes how
its cost-minimizing input choices vary as the
scale or output of its operation increases.
The long-run average cost curve is the
envelope of the short-run average cost
curves.
Chapter 7
Slide 129
Summary
A firm enjoys economies of scale when it
can double its output at less than twice the
cost.
Economies of scope arise when the firm
can produce any combination of the two
outputs more cheaply than could two
independent firms that each produced a
single product.
Chapter 7
Slide 130
Summary
A firm’s average cost of production can
fall over time if the firm “learns” how to
produce more effectively.
Cost functions relate the cost of production
to the level of output of the firm.
Chapter 7
Slide 131
End of Chapter 7
The Cost of
Production
