Lesson 3 micro - Lecture notes 3 PDF

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Lecture notes lesson 3 unit Principles of microeconomics...

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Topic 3: Production and Costs. 1. From the production function to the cost curves. A fixed cost is one that does not depend on the amount of output produced. CF = Ko x r. A variable cost is one that depends on the amount of output produced. CV = L x w. The total cost is the sum of the CF and CV of producing that amount of product. CT = CF + CV. The total cost curve shows how the total cost depends on the quantity of the product. The technical efficiency for any combination of K and L, the maximum Q I have. C / p: constant yal / p: isoquant. In order to minimize the costs of Q. y = f (K, L) The allocative efficiency for each given product level, the TC required to produce it. CT = f (y). 2. Costs al / p. 2.1 The path of expansion. The expansion path is the path that the company has to follow al / p to reduce the cost to produce different levels of Q. At l / p, this is telling me the optimal quantities that I have to buy to minimize costs for different levels of Q. The cost function comes from the expansion path. The cost function is a function that relates the minimum cost required for each level of Q. 2.2 Economies and diseconomies of scale. - Economy of scale: any production situation in which the cost per unit decreases as the number of units produced increases. - Deseconomies of scale: as a consequence of a simultaneous increase and in the same proportion of inputs, the quantity obtained from output increases to a lesser extent. When CMe decreases there is economies of scale, when CMe increases there are diseconomies of scale. 3. The ac / p costs. CTMe =

CT y

Marginal cost is the increase in TC generated by producing 1 more unit of output, that is, the cost of each additional unit. The diminishing returns make the CMa curve upward sloping.

CMa=

ΔCT Δy

The average total cost is the TC divided by the amount of output produced. The CTMe tells the producer how much it costs to produce per unit of product.

CTMe=

CT Q

The average total cost curve shows how the CTMe depends on the output. The CTMe falls at first and then the output produced increases.

When the curve slopes downward, the spread effect dominates: the CF is spread over more output units. When the curve slopes upward, the effect of diminishing returns dominates: 1 unit of output requires more variable factors of production....