PERTEMUAN 6 The Analysis Cost of Production
PERTEMUAN 6 The Analysis Cost of Production
PERTEMUAN 6 The Analysis Cost of Production
PRODUCTION
Meeting – 7
Economic
profit
Accounting
profit
Implicit
Revenue costs Revenue
Total
opportunity
costs
Explicit Explicit
costs costs
From the Production Function to
the Total-Cost Curve
• The relationship between the quantity a firm
can produce and its costs determines pricing
decisions.
• The total-cost curve shows this relationship
graphically.
Table 1 A Production Function and
Total Cost
Figure 2 Total-Cost Curve
Total
Cost
Quantity
of Output
(cookies per hour)
THE VARIOUS MEASURES OF COST
0 1 2 3 4 5 6 7 8 9 10 Quantity
of Output
(glasses of lemonade per hour)
Figure 4 Average-Cost and
Marginal-Cost Curves
Costs
$3.50
3.25
3.00
2.75
2.50
2.25
MC
2.00
1.75
1.50 ATC
1.25 AVC
1.00
0.75
0.50
0.25 AFC
0 1 2 3 4 5 6 7 8 9 10 Quantity
of Output
(glasses of lemonade per hour)
Cost Curves and Their Shapes
• Marginal cost rises with the amount of output
produced.
• This reflects the property of diminishing marginal
product.
Cost Curves and Their Shapes
• The average total-cost curve is U-shaped.
• At very low levels of output average total cost
is high because fixed cost is spread over only a
few units.
• Average total cost declines as output increases.
• Average total cost starts rising because average
variable cost rises substantially.
Cost Curves and Their Shapes
• The bottom of the U-shaped ATC curve occurs
at the quantity that minimizes average total
cost. This quantity is sometimes called the
efficient scale of the firm.
Cost Curves and Their Shapes
• Relationship between Marginal Cost and
Average Total Cost
• The marginal-cost curve crosses the average-total-
cost curve at the efficient scale.
• Efficient scale is the quantity that minimizes average
total cost.
Typical Cost Curves
• It is now time to examine the relationships that
exist between the different measures of cost.
Figure 5 Cost Curves for a Typical
Firm
Marginal Cost declines at first and then
Costs increases due to diminishing marginal product.
2.50
MC
2.00
1.50
ATC
AVC
1.00
0.50
AFC
0 2 4 6 8 10 12 14
Quantity of Output
Typical Cost Curves
• Three Important Properties of Cost Curves
• Marginal cost eventually rises with the quantity of
output.
• The average-total-cost curve is U-shaped.
• The marginal-cost curve crosses the average-total-
cost curve at the minimum of average total cost.
COSTS IN THE SHORT RUN AND IN
THE LONG RUN
• For many firms, the division of total costs
between fixed and variable costs depends on
the time horizon being considered.
– In the short run, some costs are fixed.
– In the long run, all fixed costs become variable costs.
• Because many costs are fixed in the short run
but variable in the long run, a firm’s long-run
cost curves differ from its short-run cost
curves.
SUMMARY :
$12,000
10,000
Economie Constant
s of returns to
scal scal Diseconomie
e e s of
scal
e
0 1,000 1,200 Quantity
of per Day
Cars