Theory of production

Firms Cost vs. Profit Shortrun

Production ... max. Cost ... min.

Longrun Production Cost Economies

Returns Scale Scope

Firmas Koste vs. Wins KORT termyn

Produksie ... maks. Koste ... min.

LANG termyn Produksie Koste Ekonomieë

Skaal opbrengste Skaal voordele Omvangs voordele

Chapter Layout Hoofstuk Uitleg

Define all concepts Distinguish between

concepts Explain relationship

between Production & Costs Short run Long run

Calculate and graph TP, AP, MP, TC, AC, MC, TVC, TFC, AVC, AFC

Definieer alle konsepte Onderskei tussen alle

konsepte Verduidelik die

verwantskap tussen Produksie & Koste Kort termyn Langtermyn

Bereken en teken TP, AP, MP, TC, AC, MC, TVC, TFC, AVC, AFC

Outcomes Uitkomstes

Different types of firms Verskillende tipe firmas

Intro Intro

FORMAL INFORMAL

One goal

Same concepts: Ch.10-13 Different ‘data’

Total Sum of ...

Average Total divided by Qty

Marginal Change in Total ‘per extra’ unit

Selfde konsepte: Hfs.10-13 Ander ‘data’

Totaal Som van ...

Gemiddeld Totaal gedeel deur Qty

Grens (MARGINAAL) Verandering in Totaal ‘per ekstra’ eenheid

Basic Concepts Basiese Begrippe

Basic Concepts

TR, TP, TC

AR , AP, AC

MR, MP, MC


KosteCost

InkomeRevenue

ProduksieProduction

Totale(Total)

TC = AC x QTC = TVC + TFC

TR = P x Q TP = AP x N

Gemiddeld

(Average)

AC = TC ÷ QAC = AVC + AFC

AR = TR ÷ QAR = P.Q ÷ Q

AP = TP ÷ N

Grens(Marginal

)

MC = ΔTC ÷ ΔQ

MR = ΔTR ÷ ΔQMP = ΔTP ÷

ΔN

Wins?? NB. Dieselfde konsepte

(berekeninge), net ander data

N ... veranderlike inset (arbeid) Q ... eenhede produksie

Profit?? NB. Same concepts

(calculations) other data N ... variable input (labour) Q ... Units produced

Short vs Long Kort vs Lang

KT: Ten minste EEN van die insette kan nie verander word nie.

Coke fabriek LT: ALLE insette veranderlik. Nuwe fabriek te loots Klere

SR: At least one of the inputs is fixed Coke factory

LR: All inputs are variable New factory Clothing

Normal Profit

Min profit

Accounting Profit

TR – Explicit Costs

Economic Profit

TR – (Implicit + Explicit

Costs)

Abnormal Profit

Profit > I + E

Normale Wins

Min Wins

Rekenkundige wins

TR – Eksplisiete koste Ekonomiese Wins

TR – (Implisiete + Eksplisiete Kostes)

Abnormale Wins

Wins > I + E

Profit (π) Wins (π)Is die geldbedrae

wat die firma betaal om PF en ander insette te

koop of huur.

Geleentheidskoste wat nie in die

geldelike betalings weerspieel word

nie.

Fig.11-1 WINS / PROFIT

Ekonoom

Economist

Eksplisiete koste

w, i, r

Implisiete koste

π (Normale Wins)

Ekonomiese wins

(Abnormale Wins)

Eksplisiete koste

w, i, r

Rekenkundige wins

Accounting Profit

TR-TC

Rekenkundige

Accountant

Inkomste

Income

Inkomste

11

Firms SUPPLY products Main Goal:

Maximise profit How?

Maximise the positive difference between …

TR & TC SR-Assumptions

1 product Homogenous, devisable Inputs can be divided and can

be used in limitless qty’s. Fixed production function Fixed Price (inputs & product) Fixed inputs + 1 variable

input (eg. labour)

Firmas bied produkte aan (AANBOD)

Hoofdoelwit: Wins maksimeer

Hoe? Max. positiewe verskil tussen ... TR & TC

SR(KT) – Aannames 1 produk Homogeen, verdeelbaar Insette kan in oneindig

verdeelbare Qty gebruik word. Vaste produksie funksie Gegewe Pryse (insette & produk) Vaste insette + 1 veranderlike

inset (bv arbeid)

SR KT

Fixed: FC, TFC, AFC Does not change with Q

Variable: VC, TVC, AVC Changes as Q changes

NB. Shape (of curves)

Min & Max (MAT)

Intercepts

Short run Long run

Fixed (VAS): FC, TFC, AFC verander NIE

Veranderlik: VC, AVC,

TVC verander met Q

NB. Vorm van kurwes

Waar min. & Maks. (MAT)

Snypunte

Kort Termyn Lang Termyn


MAXIMISE Define

Production Production function Law of diminishing

marginal returns Describe

Inputs / technology How can firms expand

production? LR SR General

Fixed Inputs Variable Inputs

MAKSIMEER Defineer

Produksie Produksie funksie Wet v. Dalende

meeropbrengs Omskryf

Insette / tegnologie Hoe kan firmas produksie

vermeerder? LR (LT) SR (KT) Algemeen

Vaste Insette Veranderlike Insette

Production Produksie

Tbl. 11-1LAND LABOUR TP

Fixed Variable Total ProductQ N

20 0 0

20 1 16

20 2 44

20 3 78

20 4 113

20 5 145

20 6 171

20 7 190

20 8 200

20 9 200

20 10 187

Law of diminishing returns Wet van dalende meeropbrengs

impr

ove

pc

verb

eter

pc

less productive pc

minder produktie

f pc

Tbl. 11-2 (MAT)LAND LABOUR TP MP AP

Fixed Variable TP = ΣMP

3rd Max.

MP = (TPx-TPx-1)÷N

1st Max.

AP = TP/N

2nd Max.Q N

20 0 0 - -

20 1 0+16= 16 (16-0)/1= 16 16÷1= 16.00

20 2 16+28= 44 44-16= 28 44÷2= 22.00

20 3 44+34= 78 78-44= 34 16÷3= 26.00

20 4 16+28+34+35= 113

113-78= 35 16÷4= 28.25

20 5 145 145-113= 32 16÷5= 29.00

20 6 171 171-145= 26 16÷6= 28.50

20 7 190 190-171= 19 16÷7= 27.14

20 8 200 200-190= 10 16÷8= 25.00

20 9 200 200-200= 0 16÷9= 22.22

20 10 187 187-200= -13 16÷10= 18.70

Fig. 11-2 TP, AP, MP van arbeid / of labour

Orde van bereik van maksimering

Order of reaching maximisation

MPAPTP

MP sny/cuts APmax

AP styg/increases MP>AP AP daal terwyl AP>MP TPmax waar MP=0

Tbl. 11-2 (MAT)LAND LABOUR TP MP AP

Fixed Variable TP = ΣMP

3rd Max.

MP = (TPx-TPx-1)÷N

1st Max.

AP = TP/N

2nd Max.Q N

20 0 0 - -

20 1 0+16= 16 (16-0)/1= 16 16÷1= 16.00

20 2 16+28= 44 44-16= 28 44÷2= 22.00

20 3 44+34= 78 78-44= 34 16÷3= 26.00

20 4 16+28+34+35= 113

113-78= 35 16÷4= 28.25

20 5 145 145-113= 32 16÷5= 29.00

20 6 171 171-145= 26 16÷6= 28.50

20 7 190 190-171= 19 16÷7= 27.14

20 8 200 200-190= 10 16÷8= 25.00

20 9 200 200-200= 0 16÷9= 22.22

20 10 187 187-200= -13 16÷10= 18.70

Fixed Costs i.e. LAND Total is FIXED

Variable Costs i.e. LABOUR Total CHANGES

NB. per PRODUCT (Q)

Vaste Koste bv. GROND Totaal is VAS

Veranderlike Koste bv. ARBEID Totaal VERANDER

NB. per PRODUK (Q)

Costs Kostes

Fig.11-4 3 Koste krommes / Cost curves

Vaste koste (TFC)

Fixed Costs (TFC)

Veranderlike koste

(TVC)

Variable Costs (TVC)

Totale koste (TC)

Total Costs (TC)... AVERAGE ... T ÷ Q produced / produseer

... MARGINAL ... T ÷ Q produced / produseer

Tbl. 11-3

Land Labour

TP TFC TVC TC

N Q … produced

= TC - TVC = TC - TFC = TFC + TVC

20 0 0 9 000 0 9 000

20 1 16 9 000 2 400 11 400

20 2 44 9 000 4 800 13 800

20 3 78 9 000 7 200 16 200

20 4 113 9 000 9 600 18 600

20 5 145 9 000 12 000 21 000

20 6 171 9 000 14 400 23 400

20 7 190 9 000 16 800 25 800

20 8 200 9 000 19 200 28 200

20 9 200 9 000 21 600 30 600

20 10 187 9 000 24 000 33 000

Oefen by die huis!!!!!

AANBOD:

Teorie van produksie & koste

SUPPLY: Theory of production & costs

Mohr & Fourie: Chapter / Hoofstuk 11

ECON121_2011

Long run vs. short run

Econ profit vs. Acc profit

Fixed cost vs. variable cost

Law of diminishing returns

Order of max

Lang termyn vs. Kort termyn

Ekon wins vs. Rek wins

Vaste koste vs. Veranderlike koste

Wet van dalende meeropbrengs

Orde van maks

RECAP RECAP

Basic Concepts

TR, TP, TC

AR , AP, AC

MR, MP, MC


KosteCost

InkomeRevenue

ProduksieProduction

Totale(Total)

TC = AC x QTC = TVC + TFC

TR = P x Q TP = AP x N

Gemiddeld

(Average)

AC = TC ÷ QAC = AVC + AFC

AR = TR ÷ QAR = P.Q ÷ Q

AP = TP ÷ N

Grens(Marginal

)

MC = ΔTC ÷ ΔQ

MR = ΔTR ÷ ΔQMP = ΔTP ÷

ΔN

Wins?? NB. Dieselfde konsepte

(berekeninge), net ander data

N ... veranderlike inset (arbeid) Q ... eenhede produksie

Profit?? NB. Same concepts

(calculations) other data N ... variable input (labour) Q ... Units produced

Fig. 11-2 TP, AP, MP van arbeid / of labour

Orde van bereik van maksimering

Order of reaching maximisation

MPAPTP

MP sny/cuts APmax

AP styg/increases MP>AP AP daal terwyl AP>MP TPmax waar MP=0

Fig.11-4 3 Koste krommes / Cost curves

Vaste koste (TFC)

Fixed Costs (TFC)

Veranderlike koste

(TVC)

Variable Costs (TVC)

Totale koste (TC)

Total Costs (TC)... AVERAGE ... T ÷ Q produced / produseer

... MARGINAL ... T ÷ Q produced / produseer

There to analyse a firm’s output decisions.

AFC = TFC/TP

AVC = TVC/TP

AC = TC/TP

Ontleed die firma se produksiebesluit.

AFC = TFC/TP

AVC = TVC/TP

AC = TC/TP

Average and marginal cost Gemiddelde en grenskoste

Figuur 11-5 Grens- en gemiddelde koste

Slegs een MC 3 Gemiddelde krommes AFC soos produksie AVC bereik min en

dan. AC bereik min en

dan.

Tabel 11-3 & 11-4N TP

(Q)

TFC AFC TVC AVC TC AC MC

20 0 0 9 000 - 0 - 9 000 - -

20 1 16 9 000 562.50 2 400 150.00 11 400 712.5 150.00

20 2 44 9 000 204.55 4 800 109.09 13 800 313.64 85.71

20 3 78 9 000 115.38 7 200 92.31 16 200 207.69 70.59

20 4 113 9 000 79.65 9 600 84.96 18 600 164.60 68.57

20 5 145 9 000 62.07 12 000 82.76 21 000 144.83 75.00

20 6 171 9 000 52.63 14 400 84.21 23 400 136.84 92.31

20 7 190 9 000 47.37 16 800 88.42 25 800 135.79 126.32

20 8 200 9 000 45.00 19 200 96.00 28 200 141.00 240.00

20 9 200 9 000 45.00 21 600 108.00 30 600 153.00

20 10 187 9 000 48.13 24 000 128.34 33 000 176.47

Figuur 11-5 Grens- en gemiddelde koste

Orde van minimums Order of minimima

MC AVC AC (ATC)

AFC AFC ≠ 0

MC sny / cuts AVCmin & ACmin

AC > AFC & AVC

Figuur 11-7 Verband tussen produksie en koste

Produksie / Production … max … MP max. 1st MP sny / cuts Apmaks

Kostes / Costs … min … MC min. 1st MC sny/cuts AVCmin

Now for the Long Run (LR)

Nou vir die LANG termyn (LR)

NO fixed inputs

NO law of diminishing returns

NB concepts1. Returns to scale2. Economies of scale3. Economies of scope

GEEN vaste insette nie

GEEN Wet van dalende meeropbrengs nie

Belangrike begrippe:1. Skaalopbrengs

(Returns to scale)2. Skaalvoordele

(Economies of scale)3. Omvangsvoordele

(Economies of scope)

LR production & costs LR produksie & koste

Compares % in output to % in input

Constant RTS: % output = % input

Increasing RTS: % output > % input

Decreasing RTS: % output < % input

Vergelyk % in uitsette met ‘n % in insette

Konstante RTS: % uitset = % inset

Stygende RTS: % uitset > % inset

Dalende RTS: % uitset < % inset

Returns to scale (RTS) Skaalopbrengs

Cost per Unit

Cost per unit produced decreases as production increases

Gets cheaper per unit the more you produce

Normally a high fixed cost (high start-up cost)

Koste per Eenheid

Koste per eenheid daal soos produksie styg

Word goedkoper per eenheid om meer te produseer

Gewoonlik ‘n duur vaste koste

Economies of Scale Skaalvoordele

Cost per Unit

Cost per unit produced increases as production increases

Koste per Eenheid

Koste per eenheid styg soos produksie styg

Diseconomies of Scale Skaalnadele

Related production

Cost saving if firm produces related products

Use same capital intensive inputs for production of both products

Dairy – milk & butter Automobile factory – cars

& mini-vans

Verwante produksie

Kostebesparing indien een firma verwante produkte vervaardig

Gebruik duur, kapitaal intensiewe insette vir beide produkte se vervaardiging

Melkery – Melk & botter Motorvervaardiger – karre

& mini-busse

Economies of Scope Omvangsvoordele

LRAC & LRMC influenced by … (dis)-economies of scale

3 Assumptions (LRAC)

1. Fixed price of PFs

2. Fixed technology & quality of PFs

3. Firm schoose lowest cost combination of PFs

LRAC & LRMC word beïnvloed deur ...

skaal voordele en nadele.

3 aannames (LRAC)

1. Prys van PFe is gegewe

2. Tegnologie en kwaliteit van PFe is gegewe

3. Firmas kies die laagste koste-kombinasie van produksie faktore

LRMC & LRAC LRMC & LRAC

Fig.11-9 LRAC

AC AC

Constant cost

Economies of Scale

Dis-Economies of Scale

Fig.11-10 LRMC & LRAC

Fig.11-11 LRAC

Assumptions LR vs SR

Profit (Q) Profit = Income – Costs Costs: Implicit vs. Explicit

Production (N) maximise MAT Law of Diminishing Returns

Costs (Q) Minimise MAT

LR (dis)economies Returns to scale Economies of scale Economies of scope

Aannames LR vs SR

Wins (Q) Wins = Inkome – Koste Kostes: Implisiet vs.

Eksplisiet Produksie (N)

maksimeer MAT Wet van Dalende

Meeropbrengs Koste (Q)

minimeer MAT

LR voor/nadele Skaal opbrengs Skaal voor/nadele Omvangsvoordele

Recap Hersien

Question: 4.1 4.2 4.4 4.5 4.6 4.7 4.8

Vraag: 4.1 4.2 4.4 4.5 4.6 4.7 4.8

Workbook CH 5 Werkboek Hfsk 5

QUESTION 5 VRAAG 5

Units of Land

Units of Capital

Units of Labour

NTP AP MP

15 5 0

15 5 1 4

15 5 2 7

15 5 3 19

15 5 4 7

15 5 5 8

15 5 6 42

15 5 7 5

15 5 8 2

15 5 9 50

15 5 10 -3

Question: 4.1 Complete the table 4.2 Which factors of production are fixed and which are

variable 4.4 At how many units of N is the highest TP reached? 4.5 At how many units of N is the highest MP reached? 4.6 At how many units of N is the highest AP reached? 4.7 At which point does the law of diminishing returns set

in? 4.8 At which point does TP start to increase at a

decreasing rate?

Workbook CH 5 Werkboek Hfsk 5

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Theory of production

Education

Transcript of Theory of production