Matakuliah
Tahun
: J0114-Teori Ekonomi
: 2009
THE COST OF PRODUCTION
Pertemuan 18
Economic Costs
• Explicit and Implicit Costs
Explicit cost are money payments a firm makes to outside
supplier of resources
Implicit cost are the opportunity cost associated with a firm’s
use of resources it owns
• Normal Profit as a Cost
Normal profit is is the implicit cost of entrepreneurships.
• Economic Profit (or Pure Profit)
Economic profit = Total Revenue – Economic Cost
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Profits Compared
Economic Profit Versus Accounting Profits
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Economic
Profit
Implicit Costs
(Including a
Normal Profit)
Explicit
Costs
Accounting
Total Revenue
Economic
(Opportunity)
Costs
Economics
Accounting
Profit
Accounting
Costs (Explicit
Costs Only)
Short Run and Long Run
•Short Run: Fixed Plant
•Long Run: Variable Plant
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Short-Run Production Relationships
• Total Product (TP)
• Marginal Product (MP)
• Average Product (AP)
Change in Total Product
Marginal Product =
Change in Labor Input
Average Product =
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Total Product
Units of Labor
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W 20.2
Law of Diminishing Returns
O 20.1
• Rationale
• Tabular Example
(1)
Units of the
Variable Resource
(Labor)
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0
1
2
3
4
5
6
7
8
(2)
Total Product
(TP)
0
10
25
45
60
70
75
75
70
]
]
]
]
]
]
]
]
(3)
Marginal Product
(MP),
Change in (2)/
Change in (1)
10
15
20
15
10
5
0
-5
Increasing
Marginal
Returns
Diminishing
Marginal
Returns
Negative
Marginal
Returns
(3)
Average
Product
(AP),
(2)/(1)
10.00
12.50
15.00
15.00
14.00
12.50
10.71
8.75
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Graphical
Portrayal
Total Product, TP
Law of Diminishing Returns
30
20
10
Marginal Product, MP
0
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TP
1
2
3
Increasing
Marginal
20 Returns
4
5
6
7
8
9
Negative
Marginal
Returns
Diminishing
Marginal
Returns
10
AP
1
2
3
4
5
6
7
8 9
MP
7
O 20.2
Short-Run Production Costs
Fixed, Variable and Total Cost
• Fixed Costs are those costs that in total do
not vary with changes in output
• Variable Costs are those costs that change
with the level of output
• Total Cost is the sum of fixed cost and
variable cost at each level of output
TC = TFC + TVC
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Short-Run Production Costs
Per-Unit or Average Costs
– Average Fixed Cost (AFC)
– Average Variable Cost (AVC)
– Average Total Cost (ATC)
– Marginal Cost (MC)
TFC
AFC =
Q
ATC =
TC
Q
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TVC
AVC =
Q
= AFC + AVC
MC =
Change in TC
Change in Q
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Short-Run Production Costs
Total Cost, Fixed and Variable Costs
$1100
1000
TC
900
TVC
800
Costs
700
600
Fixed
Cost
500
400
Total
Cost
300
200
Variable
Cost
100
TFC
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0
1
2
3
4
5
6
7
8
9
10
10
Q
Short-Run Production Costs
$200
Average and Marginal Costs
MC
Costs
150
AFC
ATC
AVC
100
50
AVC
AFC
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0
1
2
3
4
5
6
7
8
9
10
Q
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Average Product and
Marginal Product
Short-Run Production Costs
Production Curves
Shifts in
Cost Curves
AP
MP
Quantity of Labor
MC
Cost (Dollars)
AVC
Cost Curves
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Quantity of Output
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Long-Run Production Costs
• Economies of Scale
Economic scale are the consequence of greater specialization of
labor and management, more efficient capital equipment, and
the spreading of start-up cost among more unit output
– Labor Specialization
– Managerial Specialization
– Efficient Capital
• Diseconomies of Scale
Diseconomic scale are caused by the problems of coordination
and comunication that arise in large firm
• Constant Returns to Scale
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Long-Run Production Costs
Average Total Costs
Alternative Long-Run ATC Shapes
Constant Returns
To Scale
Economies
Of Scale
Long-Run
ATC
q1
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Diseconomies
Of Scale
Output
q2
Long-Run ATC Curve Where Economies
Of Scale Exist
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Long-Run Production Costs
Average Total Costs
Long-Run ATC Curve
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ATC-1
ATC-5
ATC-2
ATC-3
ATC-4
Long-Run
ATC
Output
The Long-Run ATC Curve Just
“Envelopes” the Short Run ATCs
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Long-Run Production Costs
Average Total Costs
Alternative Long-Run ATC Shapes
Economies
Of Scale
Diseconomies
Of Scale
Long-Run
ATC
Output
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Long-Run ATC Curve Where Costs Are
Lowest Only When Large Numbers Are
Participating
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Long-Run Production Costs
Average Total Costs
Alternative Long-Run ATC Shapes
Economies
Of Scale
Diseconomies
Of Scale
Long-Run
ATC
Output
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Long-Run ATC Curve Where Economies
Of Scale Exist, are Exhausted Quickly,
And Turn Back Up Substantially
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