hubbard01_instructorppt10.ppt

Technology,Production,and Costs,2 of 42,After studying this chapter,you should be able to:Define technology and give examples of positive and negative technological change.Distinguish between the economic short run and the economic long run.Understand the relationship between the marginal product of labor and the average product of labor.Explain and illustrate the relationship between marginal cost and average total cost.Graph average total cost,average variable cost,average fixed cost,and marginal cost.Understand how firms use the long-run average cost curve to plan.,Sony Uses a Cost Curve to Determine the Price of Radios,LEARNING OBJECTIVES,In this chapter,we will focus on the relationship between a firms technology and its production costs.,3 of 42,Technology:An Economic Definition,Technology The processes a firm uses to turn inputs into outputs of goods and services.Technological change A change in the ability of a firm to produce a given level of output with a given quantity of inputs.,4 of 42,Improving Inventory Control at Wal-Mart,10-1,Better inventory controls have helped reduce firms costs.,5 of 42,The Short Run and the Long Run,Short run The period of time during which at least one of the firms inputs is fixed.Long run A period of time long enough to allow a firm to vary all of its inputs,to adopt new technology,and to increase or decrease the size of its physical plant.,6 of 42,The Short Run and the Long Run,The Difference between Fixed Costs and Variable Costs,Total cost The cost of all the inputs a firm uses in production.Variable costs Costs that change as output changes.Fixed costs Costs that remain constant as output changes.Total Cost=Fixed Cost+Variable CostTC=FC+VC,7 of 42,Fixed Costs in the Publishing Industry,10-2,The salaries of editors are considered a fixed cost by publishers.,8 of 42,The Short Run and the Long Run,Implicit versus Explicit Costs,Opportunity cost The highest-valued alternative that must be given up to engage in an activity.Explicit cost A cost that involves spending money.Implicit cost A nonmonetary opportunity cost.,9 of 42,The Short Run and the Long Run,The Production Function,10 1,Production Function The relationship between the inputs employed by the firm and the maximum output it can produce with those inputs.,10 of 42,The Short Run and the Long Run,A First Look at the Relationship Between Production and Cost,Average total cost Total cost divided by the quantity of output produced.,11 of 42,The Short Run and the Long Run,A First Look at the Relationship Between Production and Cost,12 of 42,The Marginal Product of Labor and the Average Product of Labor,Marginal product of labor The additional output a firm produces as a result of hiring one more worker.The Law of Diminishing ReturnsLaw of diminishing returns The principle that,at some point,adding more of a variable input,such as labor,to the same amount of a fixed input,such as capital,will cause the marginal product of the variable to decline.,13 of 42,The Law of Diminishing Returns,10 3,The Marginal Product of Labor and the Average Product of Labor,14 of 42,Graphing Production,10-2,The Marginal Product of Labor and the Average Product of Labor,15 of 42,Adam Smiths Famous Account of the Division of Labor in a Pin Factory,10-3,The gains from division of labor and specialization are as important to firms today as they were in the eighteenth century when Adam Smith first discussed them.,16 of 42,The Relationship between Marginal and Average ProductAverage product of labor The total output produced by a firm divided by the quantity of workers.,The Marginal Product of Labor and the Average Product of Labor,17 of 42,An Example of Marginal and Average Values:College Grades,10-3,The Marginal Product of Labor and the Average Product of Labor,18 of 42,The Relationship Between Short-Run Production and Short-Run Cost,Marginal CostMarginal Cost The change in a firms total cost from producing one more unit of a good or service.,19 of 42,Why Are the Marginal and Average Cost Curves U-Shaped?,10-4,The Relationship Between Short-Run Production and Short-Run Cost,20 of 42,The Relationship Between Marginal and Average Cost,10-1,21 of 42,Graphing Cost Curves,Average fixed cost Fixed cost divided by the quantity of output produced.Average variable cost Variable cost divided by the quantity of units produced.Average total cost=ATC=TC/QAverage fixed cost=AFC=FC/QAverage variable cost=AVC=VC/QATC=AFC+AVC,22 of 42,Graphing Cost Curves,23 of 42,Costs in the Long Run,Economies of ScaleLong-run average cost curve A curve showing the lowest cost at which the firm is able to produce a given quantity of output in the long run,when no inputs are fixed.Economies of scale Economies of scale exist when a firms long-run average costs fall as it increases output.,24 of 42,Costs in the Long Run,Economies of ScaleConstant returns to scale Constant returns to scale exist when a firms long-run average costs remain unchanged as it increases output.Minimum efficient scale The level of output at which all economies of scale have been exhausted.Diseconomies of scale Exist when a firms long-run average costs rise as it increases output.,25 of 42,Costs in the Long Run,Long-Run Average Total Cost Curves for Bookstores,10-6,26 of 42,Using Long-Run Average Cost Curves to Understand Business Strategy,10-2,27 of 42,The Colossal River Rouge:Diseconomies of Scale at the Ford Motor Company,10-4,Is it possible for a factory to be too big?,28 of 42,Dont Confuse Diminishing Returns with Diseconomies of Scale,29 of 42,Conclusion,10 4,30 of 42,Its Win-Win as Samsung,Sony Join on Flat Screens,31 of 42,AN INSIDE LOOK,Sony Gambles on the FutureCost of the Next Generation of TVs,Economies of scale will result in a lower average total cost of production in 2013 if Sony can sell 2.8 million OLED TVs.,32 of 42,Average fixed costAverage variable costAverage product of laborAverage total costConstant returns to scaleDiseconomies of scaleEconomies of scaleExplicit costFixed costsImplicit costLaw of diminishing returnsLong run,Long-run average cost curveMarginal costMarginal product of laborMinimum efficient scaleOpportunity costProduction functionShort runTechnological changeTechnologyTotal costVariable costs,33 of 42,Appendix 10A:Using Isoquants and Isocosts to Understand Production and Cost,Isoquants,An Isoquant GraphIsoquant A curve showing all the combinations of two inputs,such as capital and labor,that will produce the same level of output.,34 of 42,Isoquants,The Slope of an IsoquantMarginal rate of technical substitution(MRTS)The slope of an isoquant;represents the rate at which a firm is able to substitute one input for another,while keeping the level of output constant.,10A-1,Appendix 10A:Using Isoquants and Isocosts to Understand Production and Cost,35 of 42,Isocost Lines,Isocost line All the combinations of two inputs,such as capital and labor,that have the same total cost.,Appendix 10A:Using Isoquants and Isocosts to Understand Production and Cost,36 of 42,Isocost Lines,The Slope and Positionof the Isocost Line,10A-2,Appendix 10A:Using Isoquants and Isocosts to Understand Production and Cost,37 of 42,Choosing the Cost-Minimizing Combination of Capital and Labor,10A-3,10A-4,Appendix 10A:Using Isoquants and Isocosts to Understand Production and Cost,38 of 42,Choosing the Cost-Minimizing Combination of Capital and Labor,Different Input Price Ratios Lead to Different Input Choices,Appendix 10A:Using Isoquants and Isocosts to Understand Production and Cost,39 of 42,The Changing Input Mix in Film Animation,A change in the price of labor relative to capital in the production of animated films led to a large reduction in the employment of animators.,10A-1,40 of 42,Choosing the Cost-Minimizing Combination of Capital and Labor,Another Look at Cost Minimization,Appendix 10A:Using Isoquants and Isocosts to Understand Production and Cost,41 of 42,Determining the Optimal Combination of Inputs,10A-1,42 of 42,The Expansion Path,Expansion path A curve showing a firms cost-minimizing combination of inputs for every level of output.,10A-6,Appendix 10A:Using Isoquants and Isocosts to Understand Production and Cost,43 of 42,Expansion pathIsocost line IsoquantMarginal rate of technical substitution(MRTS),