Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs...
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Transcript of Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs...
![Page 1: Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs What are average and marginal costs? What is meant.](https://reader035.fdocuments.in/reader035/viewer/2022081800/56649e445503460f94b37b1c/html5/thumbnails/1.jpg)
Cost
![Page 2: Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs What are average and marginal costs? What is meant.](https://reader035.fdocuments.in/reader035/viewer/2022081800/56649e445503460f94b37b1c/html5/thumbnails/2.jpg)
Learning Objectives:
• What is a cost function?
• Difference between short run and long run costs
• What are average and marginal costs?
• What is meant by economies of scale?
• How do firms maximize profit?
![Page 3: Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs What are average and marginal costs? What is meant.](https://reader035.fdocuments.in/reader035/viewer/2022081800/56649e445503460f94b37b1c/html5/thumbnails/3.jpg)
Cost Function
• Minimum cost to produce a given level of output
• In order to produce more output, the firm has to pay more for the inputs. In other words, cost of production rises as output goes up.
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Cost in Short Run and Long Run
• Variable cost includes the cost of the variable inputs, and changes with change in output.
• Fixed cost doesn’t change with change in output, as it includes the cost of inputs fixed in the short run.
• Total cost is the sum of fixed cost and variable cost.
• In the long run, all costs are variable costs.
• Example: Pricing at Dell
• Example: Egg prices likely to rise amid laws mandating cage-free henhouses
![Page 5: Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs What are average and marginal costs? What is meant.](https://reader035.fdocuments.in/reader035/viewer/2022081800/56649e445503460f94b37b1c/html5/thumbnails/5.jpg)
Average and Marginal Costs
• Average cost is cost per unit of output. • Marginal cost is the extra cost a incurs to produce one extra unit of output.• Example: Eurotunnel
![Page 6: Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs What are average and marginal costs? What is meant.](https://reader035.fdocuments.in/reader035/viewer/2022081800/56649e445503460f94b37b1c/html5/thumbnails/6.jpg)
Marginal Cost and Marginal Product
• Marginal cost is the reciprocal of marginal product times the input’s price.
![Page 7: Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs What are average and marginal costs? What is meant.](https://reader035.fdocuments.in/reader035/viewer/2022081800/56649e445503460f94b37b1c/html5/thumbnails/7.jpg)
Cost TableK L Q r w
5 0 0 1000 50 5000 0 5000 - - - -
5 1 5 1000 50 5000 50 5050 1000 10 1010 10
5 2 15 1000 50 5000 100 5100 333.33
6.67 340 5
5 3 30 1000 50 5000 150 5150 166.67
5 171.67
3.33
5 4 50 1000 50 5000 200 5200 100 4 104 2.5
5 5 75 1000 50 5000 250 5250 66.67
3.33 70 2
5 6 105 1000 50 5000 300 5300 47.62
2.86 50.48
1.67
5 7 125 1000 50 5000 350 5350 40 2.8 42.8 2.5
5 8 140 1000 50 5000 400 5400 35.71
2.86 38.57
3.33
5 9 141 1000 50 5000 450 5450 38.46
3.19 38.65
50
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Fixed Cost and Sunk Cost
• Sunk cost is the unrecoverable part of the fixed cost.
• Example: Gerbang Perdana, 2006
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Algebraic Form of Cost Function
𝐶=𝐶 (𝑄 )= 𝑓 +𝑎𝑄+𝑏𝑄2+𝑐𝑄3
![Page 10: Cost. Learning Objectives: What is a cost function? Difference between short run and long run costs What are average and marginal costs? What is meant.](https://reader035.fdocuments.in/reader035/viewer/2022081800/56649e445503460f94b37b1c/html5/thumbnails/10.jpg)
Long Run Cost
• Long run average cost (LRAC) curve traces out the minimum average costs for producing different output levels, when all the inputs can be varied.
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Economies of Scale
• If LRAC falls as a firm produces more and more output, then the firm is experiencing economies of scale.
• Example: Case: Airbus vs Boeing, 2006
• Example: Why gasoline is suddenly $3 a gallon and could go lower
• Example: Competition in the Wide-Body Aircraft Industry
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Profit Maximization
• How do firms decide how many units of each input to be hired?
• Profit function: