Output and costs
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Transcript of Output and costs
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Output and Costs
Macroeconomic Foundation Alaleh Mani2011
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Survival key of business
• Is not about its size :Garage, Convenience store, GM• Is how to produce to minimize the cost (P)• Is how much to produce(Q)• Is How soon to produce:
1. Short- run:2. Long run:
Depend on Market Structure
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Short Run
At least one factor of production is fixed: Land, capital, entrepreneurship =firm’s Plant
are fixed but labor is variable (CFA 2009) To produce more in short run firms need to
increase its variable factor Short run are easily reversed
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Long Run
A time frame that all factors of production are Variable Land, capital, entrepreneurship =firm’s Plant and
labor are variable To produce more in long run firms may increase the
plant or labor. Long run are not easily reversed Sunk Cost: Past expenditure with no resale value that
has no relation with current decision (CFA 2007-2010) Only Short run and long run decision influence on
current decision (exam 2008)
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Short run production
• Relation between output and Labor (exam 2007)
Out
put p
er d
ay
Hours and minutes
Attainable Area Inefficient
Unattain
able
area Production Possibility Curve
Attainable Area
Unattainable area
Tech
nolo
gica
l Effi
cient
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Short Run Marginal Product Curve
Increasin
g MP
Decreasing MP
Steepest Slope
Specialization and Division
Same Capital Same Space more worker
MP of additional
worker exceed MP of last
worker
Law Of Diminishing
Returns
Law of Diminishing: Marginal Production of one added unit of variable factor will diminish
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Short Run Average Production Curve
Maximum point
Maximum point
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Short Run Costs
=Cost of plant+ normal profit +sunk cost
Marginal total cost Change direction=inflection point
Economic of Scope Law of diminishing return
decrease rate
Increasing rate
Low Output
MC
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Short Run Average Cost
Law
of d
imin
ishin
g re
turn ATC is U Shape:
•AFC diminishing•Return diminishing
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Technology and Cost
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Shift in cost curve
• Technology:
Output
Cost
AFC2AFC1
AVC1
AVC2
Less LaborMore Plant
ATC1ATC2
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• Price of factor Production: Rent є Fixed Cost exp: interest rate of a truckWage є Variable Cost exp: Driver fare
If rent changes: FC, TFC, VFC, AFC would changeIf wage change: VC, TVC, AVC, MC would change
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A short brief
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Long Run Costscallop-shapedplanning Curve
Minimum efficient
Scale
∆output%>∆Production factor%
∆output%=∆Production factor%∆output%<∆Production factor%
Economically efficient plant size in short run
Difficulties of management
greater capitalization of labor and capital