Bus 301 Managerial Economics Lecture Notes
Autor: Eduardo Espinosa • December 6, 2016 • Course Note • 4,497 Words (18 Pages) • 1,060 Views
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BUS 301 Managerial Economics Lecture Notes
By Bill Y. Chen
Lecture Notes
Chapter 8 Production and Cost in the Short Run
- Basic concepts of production theory
- production: the creation of goods and services from inputs or resources;
- production function: a schedule (table, or mathematical equation) showing the maximum amount of output that can be produced from any specified set of inputs, given the existing technology;
Q = f (X1, X2, …, Xn), where X1, X2, …, Xn are inputs; specifically
Q = f (L, K), where L-Labor, K-Capital.
- Technical efficiency: production of the maximum level of output that can be obtained from a given combination of inputs; i.e. largest Q!
- Economic efficiency: production of given amount of output at the lowest possible cost; i.e. given Q, the lowest cost of the inputs!
- Short run and long run:
- fixed input: an input for which the level of usage cannot readily be changed;
- variable input: an input for which the level of usage may be changed quite readily;
- short run: that period of time in which the level of usage of one or more of the inputs is fixed; such as Q = f(L, [pic 1]) =f(L), where [pic 2]means fixed;
- long run: that period of time (for planning horizon) in which all inputs are variable.
- Variable proportions production: at which a given level of output can be produced with more than one combination of inputs;
- Fixed proportions production: at which one, and only one, ratio of fixed of inputs can be used to produce a good;
- Production in the short run
Assume that Q = f (L, [pic 3])
- Total product: given [pic 4], the amount of output (Q) with different L level;
- Average product of labor (AP): the total product (output) divided by the number of workers; AP =Q/L;
- Marginal product (MP): the additional output attributable to using one additional worker (others fixed), MP =ΔQ/ΔL;
- Law of diminishing marginal product: the principle that as the number of units of the variable input increases, other inputs held constant, a point will be reached beyond which the marginal product decreases. In other words, MP is a decreasing function of the input after some point!
- Changes in fixed inputs.
Draw graphs from Page 327
- The nature of economic costs
- opportunity cost: what the firm’s owners give up to use a resource; the sum of explicit and implicit costs.
- Explicit cost: an out-of pocket monetary payment for the use of a resource (such as salary to employees);
- Implicit cost: the forgone return the firm’s owners could have received had they used their own resources in their best alternative use (such as owners’ talents);
- Normal profit: the implicit cost of using owner-supplied resources (that is regular reasonable compensation to the owners for their own resources);
- Fixed costs: payments for fixed inputs, fixed regardless of the level of output;
- Variable costs: payments for variable inputs;
- Total fixed cost (TFC) and total variable cost (TVC):
TC = TFC + TVC;
- average fixed cost (AFC), average variable cost (AVC), average total cost (ATC):
AFC =TFC/Q; AVC =TVC/Q; ATC =TC/Q =AFC + AVC;
- short run marginal cost(SMC): the change in either total variable cost or total cost per unit change in output:
SMC = ΔTVC/ΔQ =ΔTC/ΔQ;
Draw a graph from Page 338 (Short-run average and marginal cost curves).
- Relations between short-run costs and production
TVC =w L, TFC =rK, TC =wL + rK, where w and r are wage rate and the price of unit capital, respectively.
(1) average variable cost and average product:
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