nlecture10 - cost - slides

nlecture10 - cost - slides - 2/7/2009 Topic 5: Production...

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2/7/2009 1 Topic 5: Production (2) USC Marshal Cost minimization Cost minimization • Having described the production technology, we can now consider the costs of production • The cost of producing Q units is simply the amount of capital and labor needed times their price: USC Marshal – We call this the isocost line, analogous to budget constraint – Of course, a firm is not tied to a given cost level. But it still wants to produce any quantity at the lowest cost possible C rK wL Cost minimization • Sometimes undertaking any production requires a fixed capital outlay, even in the long-run. We call this outlay an avoidable fixed cost, FC. It simply shifts the total cost curve upwards by a fixed amount. USC Marshal – An avoidable fixed cost is any cost incurred by the firm that is independent of the scale of production but has to be paid to undertake any production. • Minimum size of a factory , phone line, computer,… C rK wL F
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2/7/2009 2 Cost minimization Short run: the firm has a fixed level of capital but can adjust its level of labor – Ability to optimize production is limited Long run: the firm can adjust both capital and labor levels USC Marshal – Want the minimum-cost combination of labor and capital to produce Q* units of output Cost minimization Short run: – The level of capital is fixed. The compensation for capital is thus a fixed cost – Sunk or avoidable? • If they payment has already been made and it USC Marshal cannot be resold (approximately the definition of a short-run), then it is a sunk cost Cost minimization Short-run (total) cost of production: – The firm is stuck at a given level of capital. • The capital is a (sunk) fixed cost – But the firm is free to alter the amount of labor it hires Q F K , L L Q USC Marshal • Labor is a variable cost – The amount of L needed to produce Q units of output is given by L(Q) – The short-run total cost of production is then: C fixed r K variable wL Q
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2/7/2009 3 Cost minimization • Measures of short-run costs: – Instead of using the costs on the previous slide, more useful to look at three different measures: Short-run marginal cost: SMC Q dSTC Q dQ USC Marshal • Short-run average total cost: • Short-run average variable cost: Defined for any given level of capital SATC Q STC Q Q SAVC Q
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nlecture10 - cost - slides - 2/7/2009 Topic 5: Production...

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