e100_winter2010_lecture9_topost

e100_winter2010_lecture9_topost - Formalize COST of...

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Unformatted text preview: Formalize COST of production • With multiple inputs, costs are: • wL + rK = TC • K = TC/r – (w/r)L • This line defines all combinations that cost same amount --ISOCOST line Now, combine ISOCOST lines & ISOQUANT K L TC/w TC/r Slope=-w/r q0 • Recall we are looking for lowest cost way to product fixed quantity (q0) • This will occur at tangency between isoquant and isocost • Recall, mathematical solution to cost minimization was where slopes of isoquant & isocost are equal Firm’s Response to Change in Input Prices K L TC/w TC/r Slope=-w/r Increase in P of labor (w) (for now assume firm wants to produce same Q) K L TC/w TC/r • This gives solution for to HOW to produce, at minimum cost, some level of output Q0. (when multiple inputs may be varied) • Other key question: what level of output to produce? Cost Functions • Cost Function relates costs of production to the quantity of output • TC(Q) : translates amount of output into costs, assuming each unit is produced in cost-minimizing way Cost Functions • Contrast with MECHANICAL relationship between chosen inputs and costs • Above, we expressed Cost as a mechanical/technical function of input quantities & prices (ISOCOST) • Cost function: captures cost-minimizing behavior • Total Cost = Total Variable Cost & Total Fixed Costs • TFC = costs that are not a function of the level of output – License to operate plant – Accountant, office space • TVC=costs that do depend on output Labor, raw materials TC(Q) TVC(Q) FC $ Q • Average Costs (per unit) = TC(Q)/Q • AFC = FC/Q • AVC = TVC(Q)/Q $ Q AFC ATC AVC • Marginal Cost: Increase in Cost from producing one additional unit of output • MC = d(TC(Q))/dQ Marginal & Average Costs $ Q ATC AVC MC MC is a function ONLY of variable costs...
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e100_winter2010_lecture9_topost - Formalize COST of...

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