1、Chapter 5The Production Process and CostsMcGraw-Hill/IrwinCopyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter OutlineThe production functionShort- versus long-run decisionsMeasures of productivityManagers role in production processProduction function and productivity algebr

2、aic formsIsoquants and isocostsCost minimization and optimal input substitutionThe cost functionShort-run costsAverage and marginal costsRelations among costsFixed and sunk costsCost function algebraic formsLong-run costs and economies of scaleMultiple-output cost functionsEconomies of scope and cos

3、t complementarity5-2Chapter OverviewIntroductionChapter 4 focused on how consumers adjust consumption decisions in reaction to price and income changes. The theory developed illustrates the underlying principles of individual and market demand curves.This chapter examines how managers select the opt

4、imal mix of inputs that minimize production costs.5-3Chapter OverviewThe Production Function5-4The Production FunctionShort-Run versus Long-Run Decisions: Fixed and Variable InputsShort-runPeriod of time where some factors of production (inputs) are fixed, and constrain a managers decisions.Long-run

5、Period of time over which all factors of production (inputs) are variable, and can be adjusted by a manager.5-5The Production FunctionMeasures of Productivity5-6The Production FunctionMeasures of Productivity in Action5-7The Production FunctionRelation between Productivity Measures in Action5-8Labor

6、 input(holding capital constant)0Total productAverage productMarginal productTotal product (TP)Average product (APL)Marginal product (MPL)Increasing marginal returns to laborDecreasing marginal returns to laborNegativemarginal returns to laborThe Production FunctionThe Managers Role in the Productio

7、n Process5-9The Production FunctionManagers Role in the Production Process in Action5-10The Production FunctionAlgebraic Forms of Production Functions5-11The Production FunctionAlgebraic Forms of Production Functions in Action5-12The Production FunctionAlgebraic Measures of Productivity5-13The Produ

8、ction FunctionAlgebraic Measures of Productivity in Action5-14The Production FunctionIsoquants and Marginal Rate of Technical Substitution5-15The Production FunctionIsoquants and Marginal Rate of Technical Substitution in Action5-16Labor Input0ABSubstituting labor for capitalIncreasing outputCapital

9、 InputThe Production FunctionDiminishing Marginal Rate of Technical Substitution in Action5-17Labor Input0DCCapital InputBAThe Production FunctionIsocost and Changes in Isocost Lines5-18The Production FunctionIsocost Line5-19Labor Input0Capital InputThe Production FunctionChanges in the Isocost Line

10、5-20Labor Input0Capital InputThe Production FunctionLess expensive inputbundlesMore expensive inputbundlesChanges in the Isocost Line5-21Labor Input0Capital InputThe Production FunctionCost-Minimization Input Rule in Action5-22Labor Input0Capital InputThe Production FunctionCost Minimization and the

11、 Cost-Minimizing Input Rule5-23The Production FunctionCost-Minimizing Input Rule in Action5-24The Production FunctionOptimal Input Substitution in Action5-25Labor Input0BCapital InputNew cost-minimizing point due to higher wageAInitial point of cost minimizationThe Production FunctionHIFJGThe Cost F

12、unction5-26The Cost FunctionShort-Run Costs in Action5-27Output0Total costsVariable costsFixed costsThe Cost FunctionAverage and Marginal Costs5-28The Cost FunctionThe Relationship between Average and Marginal Costs in Action5-29Output0ATC, AVC, AFC and MC ($)Minimum of ATCMinimum of AVCThe Cost Fun

13、ctionFixed and Sunk CostsFixed costsCost that does not change with output.Sunk costCost that is forever lost after it has been paid.Principle of Irrelevance of Sunk CostsA decision maker should ignore sunk costs to maximize profits or minimize loses.5-30The Cost FunctionLong-Run CostsIn the long run

14、, all costs are variable since a manager is free to adjust levels of all inputs.Long-run average cost curveA curve that defines the minimum average cost of producing alternative levels of output allowing for optimal selection of both fixed and variable factors of production.5-31The Cost FunctionLong

15、-Run Average Total Costs in Action5-32Output0LRAC ($)The Cost FunctionEconomies of ScaleEconomies of scaleDeclining portion of the long-run average cost curve as output increase.Diseconomies of scaleRising portion of the long-run average cost curve as output increases.Constant returns to scalePortio

16、n of the long-run average cost curve that remains constant as output increases.5-33The Cost FunctionEconomies and Diseconomies of Scale in Action5-34Output0LRAC ($)The Cost FunctionEconomies of scaleDiseconomies of scaleConstant Returns to Scale in Action5-35Output0LRAC ($)The Cost FunctionMultiple-Output Cost Function5-36Multiple-Output Cost FunctionMultiple-Output Cost Function in Action5-37Multiple-Output Cost FunctionConclusion5-385-39Labor Input0Capital InputThe Production FunctionCost-Minimization