Me Chapter 9
Me Chapter 9
and Cost in
the Long Run
CHAPTER 9
1
Isocost
Curves
Graphical representation that shows
the various combinations of inputs that
may be purchased for a given level of
expenditure at given input prices.
Isocost Curves
Characteristics
Helps the firm to produce given
output at minimum cost.
Helps the firm to adjust between
two inputs when the price of one
input changes.
Isocost Curve Equation
FORMULA :
where:
w = the wage rate of labor
L = the amount of labor employed
K = the amount of capital employed
r = the rental rate of capital
Example:
Suppose a manager must pay $25 for each unit of labor services and $50 for each
unit of capital services employed. The manager wishes to know what
combinations of labor and capital can be purchased for $400 total expenditure
on inputs.
c = 400 w = 25
r = 50 k = ?
L=?
Isocost
Slope
Shifts in
Isocost Curve
MRTS= W/R
The Marginal Product Approach
to Cost Minimization
The marginal rate of technical substitution (MRTS) examines the level
where one input can be replaced for another resource with production remaining constant.
In combination E, the marginal product per dollar spent on labor is equal to the marginal product per dollar
spent on capital,and the constraints Is met (Q= 10,000)
Production of Maximum Output
with a Given Level of Cost
The last unit of labor adds 3 units of output per dollar spent; the last unit of capital
adds 4 units of output per dollar. If the firm wants to produce the maximum output
possible with a given level of cost, it could spend $1 less on labor, thereby reducing
labor by half a unit and hence output by 3 units. It could spend this dollar on capital,
thereby increasing output by 4 units. Cost would be unchanged, and total output
would rise by 1 unit. And the firm would continue taking dollars out of labor and
adding them to capital as long as the inequality holds. But as labor is reduced, its
marginal product will increase, and as capital is increased, its marginal product will
decline. Eventually the marginal product per dollar spent on each input will be equal.
4
Optimization
and Cost
Optimization refers to the process of maximizing
or minimizing an objective function, subject to
certain constraints.
Cost analysis involves assessing and
understanding the various costs associated with
producing goods or services.
Expansion Path
10 1
20 2
Expansion Path and
Structure Cost
The structure of cost refers to the composition and
distribution of costs within a firm. It analyzes how costs are
categorized and allocated across different cost
components such as fixed costs, variable costs, semi-
variable costs, direct costs, indirect costs, etc.
The cost structure provides insights into the proportion
and behavior of different cost types.
Expansion Path and Structure Cost
Economies of Scale
As the quantity of output goes up,
the cost per unit goes down
Diseconomies of Scale
As the quantity of output goes up,
the cost per unit goes up
Economies of Scope
Exist when the joint cost of producing two or more goods is less
than the sum of the separate costs of producing the goods.
MULTIPRODUCT TOTAL COST FUNCTION: LTC (X,Y)
Example
Two or more products made from The cost of common inputs gets
a single input spread over multiple products or
Employing resources to produce services
another good at little or no Marginal costs will be less costly
additional cost
PURCHASING ECONOMIES OF SCALE
Quantity Discounts
Long run is the firm’s planning period and the short run its production
period. Indeed, we call the long run the firm’s planning horizon. The long-
run cost function gives the most efficient (the least-cost) method of
producing any given level of output, because all inputs are variable.
Long-Run Average Cost as the Planning Horizon
Restructuring Short-Run Costs
Because managers have the greatest flexibility to choose inputs in the long run,
costs are lower in the long run than in the short run for all output levels except the
output level for which the fixed input is at its optimal level. Thus the firm’s short-
run costs can generally be reduced by adjusting the fixed inputs to their optimal
long-run levels when the long-run opportunity to adjust fixed inputs arises.
THANK YOU FOR
LISTENING!
Presented by:
Bautista, Mary Rocel
Eleazar, Lovely
Magrata, Mary Collen
Pedrezuela, Angela
Traje, Isabel