【正文】 Chapter 7 The Cost of Production Chapter 7 Slide 2 Topics to be Discussed ? Measuring Cost: Which Costs Matter? ? Cost in the Short Run ? Cost in the Long Run ? LongRun Versus ShortRun Cost Curves Chapter 7 Slide 3 Topics to be Discussed ? Production with Two OutputsEconomies of Scope ? Dynamic Changes in CostsThe Learning Curve ? Estimating and Predicting Cost Chapter 7 Slide 4 Introduction ? The production technology measures the relationship between input and output. ? Given the production technology, managers must choose how to produce. Chapter 7 Slide 5 Introduction ? To determine the optimal level of output and the input binations, we must convert from the unit measurements of the production technology to dollar measurements or costs. Chapter 7 Slide 6 Measuring Cost: Which Costs Matter? ? 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 Economic Cost vs. Accounting Cost Chapter 7 Slide 7 ? Opportunity cost. ? Cost associated with opportunities that are foregone when a firm’s resources are not put to their highestvalue use. Measuring Cost: Which Costs Matter? Chapter 7 Slide 8 ? 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? Measuring Cost: Which Costs Matter? Chapter 7 Slide 9 ? Sunk Cost ? Expenditure that has been made and cannot be recovered ?Should not influence a firm’s decisions. Measuring Cost: Which Costs Matter? Chapter 7 Slide 10 ? 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 $ million. ? The firm finds another building for $ million. ? Which building should the firm buy? Measuring Cost: Which Costs Matter? Chapter 7 Slide 11 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 12 ? Northwestern University Law School 3) 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 (. what it could be sold for) Choosing the Location for a New Law School Building Chapter 7 Slide 13 ? Northwestern University Law School 3) Choosing a Site ?Chicago location chosenvery 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” Choosing the Location for a New Law School Building Chapter 7 Slide 14 ? 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… V C FC TC ??Measuring Cost: Which Costs Matter? Fixed and Variable Costs Chapter 7 Slide 15 ? Fixed Cost ? Does not vary with the level of output ? Variable Cost ? Cost that varies as output varies Measuring Cost: Which Costs Matter? Fixed and Variable Costs Chapter 7 Slide 16 ? 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 Measuring Cost: Which Costs Matter? Chapter 7 Slide 17 ? Personal Computers: most costs are variable ?Components, labor ? Software: most costs are sunk ?Cost of developing the software Measuring Cost: Which Costs Matter? Chapter 7 Slide 18 ? Pizza ?Largest cost ponent is fixed Measuring Cost: Which Costs Matter? A Firm’s ShortRun Costs ($) 0 50 0 50 1 50 50 100 50 50 50 100 2 50 78 128 28 25 39 64 3 50 98 148 20 4 50 112 162 14 28 5 50 130 180 18 10 26 36 6 50 150 200 20 25 7 50 175 225 25 25 8 50 204 254 29 9 50 242 292 38 10 50 300 350 58 5 30 35 11 50 385 435 85 35 Rate of Fixed Variable Total Marginal Average Average Average Output Cost Cost Cost Cost Fixed Variable Total (FC) (VC) (TC) (MC) Cost Cost Cost (AFC) (AVC) (ATC) Chapter 7 Slide 20 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: QTCQVC MC??????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: QT V CQT F C A T C ??Chapter 7 Slide 22 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: QTCo r AVC A F C A T C ??Chapter 7 Slide 23 Cost in the Short Run ? The Determinants of ShortRun 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 24 Cost in the Short Run ? The Determinants of ShortRun 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 25 Cost in the Short Run ? For Example: Assume the wage rate (w) is fixed relative to the number of work