Historia Cost Aua ash outay hen the produe as purhased. Use mainy for tax purposes and SEC fiings. Current Costs Amount that oud be paid under prevaiing market onditions. Repaement ost The amount it takes to repae produtive apabiity using urrent tehnoogy. Aounting Costs The simpe doar ost of and input. Opportunity Cost Foregone vaue assoiated ith urrent rather that next-best use of an asset. Eonomi Costs Aounting ost minus opportunity osts Expiit ost Out-of-poket expenditures Impiit ost Non-ash osts. Inrementa Cost Change in ost aused by a given manageria deision. rofit ontribution rofit before fixed harges. (Ho muh does a item add to short term operating profits. Sunk osts Cost that does not vary aress deision aternatives. These osts shoud not pay a roe in determining the optima ourse of ation for a ompany. Cost Funtion The ost-output reation. Short-run ost funtion Basis for day-to-day operating deisions. Short run Operating period during hih at east one input is fixed. Fixed ost Expense that does not vary ith output.
Variabe ost Expense the futuates ith output. Short run ost urves Cost-output reation for a speifi pant and operating environment. Tota Cost Tota Fixed ost + Tota Variabe Costs TCTFC + TVC Average Fixed osts. AFC (TFC/ Q Average Variabe Costs AVC TVC/Q Average Tota Cost ATC TC/Q Margina Cost MC DTC / DQ or TC / Q fimc DTC / DQ DTVC / DQ or TVC / Q $ Fixed Cost Variabe Cost Tota Cost Fixed Cost Q $ MC ATC AVC AFC Q
Long run anning period ith ompete input fexibiity. Long-run ost funtion Basis for ong-range panning. Long run ost urves Cost-output reation for the optima pant in the present operating environment. In the ong run there are no fixed ost a ost are variabe.(lrtclrvc Hoever the ong run variabe ost funtion i inorporate different uantities of short run fixed osts. For instane many there as a sma pant that got rebuit into a bigger pant. Both prodution proesses shoud be aptured in the ong run variabe (tota ost. Eonomies of Sae Dereasing (usuay ong run average osts. Euivanty this inreasing output per unit of input. In other ord eah unit of ombined input resuts in more output than the unit before it did. In the graphs beo is hat eonomist beieve the typia ost and prodution funtion ook ike. They start ith inreasing returns then dereasing returns to sae. (Right ere inreasing returns turn to dereasing returns e have onstant returns to sae. Output Tota rodut $ Tota Cost Inreasing Returns Dereasing Returns Inreasing Returns Dereasing Returns Inputs Output
If e ere to put the prodution graph on it side here both graphs have output on the same axis the hange from inreasing returns to dereasing return shoud be the same. (Assuming onstant pries of inputs. Cost eastiity erentage hange in tota ost assoiated ith a 1% hange in output. e C (%D(TC/ %D(Q((TC/C/( Q/Q (TC/Q (Q/TC Minimizing SR ost urves represent the optima (perhaps profit maximizing eve given fixed ost. LR ost urve i give the optima eve ithout fixed ost. We an think of the LR ost urve therefore as the oetion of optima point on the short run ost urve ith different ombinations of fixed ost (ike pant and euipment. If e think about the average ost urves ith the LRAC urves being tangent to the group of SRAC urves. So the LRAC urve is the Enveope of the SRAC urves. SRACs LRACs Capaity Output eve at hih short-run average osts are minimized. Minimum effiient sae (MES Output eve at hih ong-run osts are minimized. The MES of the typia firm in a market i determine the market struture. If ost are minimized at high eves of output there is ikey to be itte ompetition. If ost are minimized at o eves of output there is ikey to be a ot of ompetition.
Mutipant eonomies of sae Cost advantages from operating mutipe faiities in the same ine of business or industry. Mutipant diseonomies of sae Cost disadvantages from managing mutipe faitties in the same ine of business or industry. Exampe: Learning urve Average ost redution over time due to prodution experiene. Eonomies of sope Cost redution for produing ompementary produts Cost-voume-profit anaysis Anaytia tehniue used to stude reations among ost revenues and profits. Breakeven uantity A zero profit ativity eve. Degreee of operating everage erentage hange in profit form a 1% hange in output. MC AT C at AVC A Q
Tota osts in terms of inputs: C L + vk Minimization of ost (Lagrangian L L + vk + L - f L L v - f K L 0 - f L K 0 0 [ - f ( k L ] 0 ( K L 0 These 1 st order onditions give: f K /v f L / hih means that the ast unit of abor ost as muh as the prodution from the ast unit of apita. v f L f K Graphiay: Isoost ut this together ith the isouant:
Cost minimization ours at the point of tangeny. Expansion path: Shepard`s Lemma: L vk +L +_( 0 f(kl C C( C( L( v v C( L( Supersript (. K ( L ( Tota revenue: R( ( Margina revenue: dr d dp MR ( p + p + d d d dp d _ Tota revenue Tota ost R( C( Max. rofit: dr dc dr dc - 0 fi d d d d MR MC at profit maximization. 2 nd order ondition:
2 d dd * < 0 to insure it is a maximum. MR and Eastiity of Demand MR MR p + È Í pí1 + Í Í Î dp d p + p dp p d 1 È 1 pí1 + p d ÍÎ dp e p È pí1 + Î p dp d e p < -1 fi MR > 0 e p -1 fi MR 0 e p > -1 fi MR < 0 At profit maximization: MR MC so: MC È 1 - MC 1 pí1 + fi - ÍÎ e p p e p D MR Firm s short run suppy urve for prie taking firm the upper sope portion of MC.
The sum of a MC i be the industry suppy urve. rofit funtion: C f(kl vk L ( Max K (KL Max KL [f(kl vk - L] roperties of _ funtion: 1. Homogeneity in pries (Input & Output 2. rofit funtions are non-dereasing in output pries. 3. rofit funtions are non-inreasing in input prie. 4. rofit funtions are onvey in output pries. Enveope resuts ( ( v ( ( -K( -L( roduer surpus in short run: SMC S 2 Q 2
S 2 2 Ú ( d Ú d ( 2 - (0 0 0 Express profit in terms of K and L: _(KL f(kl vk L rofit max. and input demand K L f p - v 0 K f p - 0 L Margina Revenue rodut Def: The extra revenue the firm reeives hen it empoys one more unit of input. In prie taking ase here is onstant: MR L M L * f L MR K MK* f K Seond order ondition: KK LL KK f f KK LL LL < 0 < 0-2 KL f KK f LL - f 2 KL > 0 Substitution and output effet These are simiar to the substitution and inome effet in the indifferene urves. Of ourse here minimizing ost instead of maximizing utiity. 1. Substitution effet auses any given output eve to be produed using more of the input 2. The fe in osts ause more of the good to be sod thereby reating additiona output (output effet that inrease demand for the input.
We must remember that e have 2 funtions for input demand: one ond. on being fixed and the other here profit is maximized and an very. v v v v v + ( ( ( ( ( 0 MC MC MC Outputeffet ( (+ (- (+ So output effet is negative hen MC. Substitution effet fixed Output effet from _