Tài liệu Production and Cost Analysis I doc

© 2003 McGraw-Hill Ryerson Limited.
Production and Cost
Production and Cost
Analysis I
Analysis I
Chapter 9
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
9 - 2
Introduction
Introduction

In the supply process, people first offer
the factors of production they control to
the market.

Then the factors are transformed by firms into goods that
consumers want.

Production occurs when factors of production (inputs) transform
into goods and services.
© 2003 McGraw-Hill Ryerson Limited
9 - 3
The Role of the Firm
The Role of the Firm

A firm is an economic institution that
transforms factors of production into
consumer goods and services.
© 2003 McGraw-Hill Ryerson Limited
9 - 4

The Role of the Firm
The Role of the Firm

A firm:

Organizes factors of production.

Produces goods and services.

Sells produced goods to individuals,
businesses or government.
© 2003 McGraw-Hill Ryerson Limited
9 - 5
The Firm and the Market
The Firm and the Market

A firm operates within the market and,
simultaneously, it abandons the market
in the sense that it replaces the market
with command and control.
© 2003 McGraw-Hill Ryerson Limited
9 - 6
The Firm and the Market
The Firm and the Market

How an economy operates depends on
transaction costs—costs of
undertaking trades through the market.
© 2003 McGraw-Hill Ryerson Limited
9 - 7

Firms Maximize Profit
Firms Maximize Profit

Firm’s goal is to maximize profit.

Profit is the difference between total
revenue and total cost.
Profit = Total revenue – Total cost
© 2003 McGraw-Hill Ryerson Limited
9 - 8
Firms Maximize Profit
Firms Maximize Profit

An accountant will calculate profit by
subtracting explicit costs from the
revenue.

For an economist,the measure of profit
is revenues minus both implicit and
explicit costs.
© 2003 McGraw-Hill Ryerson Limited
9 - 9
Firms Maximize Profit
Firms Maximize Profit

Implicit costs include the opportunity
costs of the factors of production.
Economic profit = Revenue – (Implicit
costs +Explicit costs)
© 2003 McGraw-Hill Ryerson Limited

9 - 10
The Production Process
The Production Process

The production process is generally
divided into a long run planning decision
and the short run adjustment decision.
© 2003 McGraw-Hill Ryerson Limited
9 - 11
The Long Run and the Short
The Long Run and the Short
Run
Run

A long-run decision is a decision in
which the firm can choose the least
expensive method of producing from
among all possible production
techniques.
© 2003 McGraw-Hill Ryerson Limited
9 - 12
The Long Run and the Short
The Long Run and the Short
Run
Run

A short-run decision is one in which
the firm is constrained by past choices
in regard to what production decisions it
can make.

© 2003 McGraw-Hill Ryerson Limited
9 - 13
The Long Run and the Short
The Long Run and the Short
Run
Run

The terms long run and short run do not
necessarily refer to specific periods of
time.

They refer to the degree of flexibility the
firm has in changing the level of output.
© 2003 McGraw-Hill Ryerson Limited
9 - 14
The Long Run and the Short
The Long Run and the Short
Run
Run

In the long run:

By definition, the firm can vary the inputs as
much as it wants.

All inputs are variable.
© 2003 McGraw-Hill Ryerson Limited
9 - 15
The Long Run and the Short
The Long Run and the Short

Run
Run

In the short run:

Flexibility is limited.

Some factors of production cannot be changed.

Generally, the production facility (“the plant”) is fixed in the short
run.
© 2003 McGraw-Hill Ryerson Limited
9 - 16
Production Tables and
Production Tables and
Production Functions
Production Functions

How a firm combines factors of
production to produce consumer goods
can be presented in a production table.

A production table shows the output
resulting from various combinations of
factors of production or inputs.
© 2003 McGraw-Hill Ryerson Limited
9 - 17
Production Tables and
Production Tables and
Production Functions

Production Functions

Most of the production decisions firms
make are short run decisions involving
changes in output at a given production
facility.

The firm can increase or decrease
production by adjusting the amount of
variable inputs, such as labour or
materials.
© 2003 McGraw-Hill Ryerson Limited
9 - 18
Production Tables and
Production Tables and
Production Functions
Production Functions

Total product is the number of units of
the good or service produced by a
different number of workers.
© 2003 McGraw-Hill Ryerson Limited
9 - 19
Production Tables and
Production Tables and
Production Functions
Production Functions

Marginal product is the additional
output that will result from an additional

worker, other inputs remaining constant.

Average product is calculated by
dividing total output by the number of
workers who produced it.
© 2003 McGraw-Hill Ryerson Limited
9 - 20
Production Tables and
Production Tables and
Production Functions
Production Functions

The information in a production table is
often summarized in a production
function – a curve that describes the
relationship between the inputs (factors
of production) and outputs.
© 2003 McGraw-Hill Ryerson Limited
9 - 21
Production Tables and
Production Tables and
Production Functions
Production Functions

The production function discloses the
maximum amount of output that can be
derived from a given number of inputs.
© 2003 McGraw-Hill Ryerson Limited
9 - 22
A Production Table,

A Production Table,
Figure 9-1a, p 203
Figure 9-1a, p 203
Number of
workers
Total
output
Marginal
product
Average
product
Increasing
marginal
productivity
Diminishing
marginal
productivity
Diminishing
absolute
productivity
4
6
7
6
5
3
1
0
2
5

1
2
3
4
5
6
7
8
9
10
0
4
5
5.7
5.8
5.6
5.2
4.6
4.0
3.3
2.5
—
4
10
17
23
28
31
32
32

30
25
0
© 2003 McGraw-Hill Ryerson Limited
9 - 23
Output
Diminishing
marginal
productivity
Diminishing
absolute
productivity
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10

Increasing
marginal
productivity
Number of workers
TP
Output per worker
1 2 3 4 5 6 7 8 9 10
Number of workers
7
6
5
4
3
2
1
0
MP
Diminishing
marginal
productivity
Diminishing
absolute
productivity
(a) Total product (b) Marginal and average product
AP
A Production Function,
A Production Function,
Figure 9-1b
Figure 9-1b
and c, p 203

and c, p 203
© 2003 McGraw-Hill Ryerson Limited
9 - 24
The Law of Diminishing
The Law of Diminishing
Marginal Productivity
Marginal Productivity

The law of diminishing marginal
productivity is an important element in
all real-world production processes.

Both marginal and average
productivities initially increase, but
eventually they both decrease.
© 2003 McGraw-Hill Ryerson Limited
9 - 25
The Law of Diminishing
The Law of Diminishing
Marginal Productivity
Marginal Productivity

This means that initially the production
function exhibits increasing marginal
productivity.

Then it exhibits diminishing marginal productivity.

Eventually, the production function exhibits negative
marginal productivity.