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Cost, return and profit By Agustina Shinta

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UNDERSTANDING PRODUCTION COSTS 1.Economic Costs Cost attributed to all resources, including purchased inputs, equity capital, and operator/family labor and management. 2.Financial Costs Cost attributed to all resources, except equity capital and operator/family labor and management. 3.Cash Expenditures Only cash expenditures are considered, including principal and interest on term debt and personal withdrawals. Depreciation and interest on equity are excluded. rAlternative Definitions of Production Costs:

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SHORT RUN AND LONG RUN The short run is that period of time during which one or more of the production inputs is fixed in amount and cannot changed The long run is defined as that period of time during which quantity of all necessary productive inputs can be changed

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Seven cost consepts 1.TFC 2.AFC 3.TVC 4.AVC 5.TC 6.ATC 7.MC

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FIXED COSTS The costs associated with owning a fixed input or resource These are the costs that are incurred even if the input is not used, and there may be additional costs if it is actually used in producing some product FC do not change as the level of production changes in the short run but can change in the long run as the quantity of the fixed input changes.

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TFC is simply the summation of the several types of fixed costs. F.E : depreciation, insurance, repairs, taxes (property taxes, not income taxes) and interest. -- Dirty 5 Cost TFC Output

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Depreciation method Annual depreciation=cost-salvage value useful life Cost = equal to the purchase price, useful life = the number of years the item is expected to be owned Salvage value = its expected value at the end of the useful life

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Interest rate is the opportunity cost of capital Interest = cost + salvage value x interest rate 2 An example : The purchase of a machine for US$20,000 with a salvage value of US$ 5,000 and a useful life of 5 years. Annual property taxes are estimated to be US$ 25, annual insurance is US$ 50, and the opportunity cost of capital is 12 %. Total Fixed costs?????

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AFC = fixed costs per unit output AFC = TFC/ output Cost FC Q AFC 3 Q1Q1 Q1Q1 AFC 1 AFC 2 AFC A Q 0

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VARIABLE COST VC are those which the manager has control over at a given point time. They can be increased or decreased at the manager’s discretion and will increase as production is increased Such as feed, fertilizer, seed, chemicals, fuel and livestock health expense TC can be found by summing each of the individual vc. AVC = TVC/ output

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CostVC K AVC 3 Q2Q2 Q1Q1 AVC 1 AVC 2 AVC QQ3Q3 L N minimum S 0

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Marginal Cost Definition: As the change in total cost divided by the change in output MC = ∆TC/∆y = ∆TC/∆y MC pd titik tertentu adalah slope dr fungsi biaya total dlm bentuk turunan sbb: MC = dTC/dy = dTC/dy Fs MC adalah fs yg menjelaskan slope dr fungsi biaya total

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MC = ∂ y∂ y = + A marginal cost curve is the graph of a firm’s marginal cost function. Marginal Cost ∂TC∂FC∂VC ∂ y∂ y ∂ y∂ y Q C FC VC MC TC Marginal cost minimum pd saat inflection point (MPP maximum)

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Q C FC VC MC AFC AVC AC Q C

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Over very long periods all costs are normally threated as variable Why? The categorization of each input as afixed or variable-cost item cannot be made without explicit reference to the particular periode involed. The proportion of fixed to variable costs increasing as the length of time is shortened, and declining as the length of time increases.

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Beberapa ahli ekomomi mendefinisikan jangka panjang sbg suatu periode waktu yg cukup panjang untuk mengubah ukuran usaha (size of plant) Kurva biaya rata-rata jk pendek berbentuk huruf U Perilaku Produsen (pd PPS) MR = SRMC (short run marginal cost) SRAC & SRMC terkait dg ukuran usaha pd waktu tertentu yg cukup, produsen dpt mengubah ukuran usaha dg menambah mesin, menjual atau membeli lahan, dan peralatan

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Long-run average cost (LRAC) can derived by drawing an envelope curve which comes tangent to each short-run average cost curve SAC 1 SAC 2 LAC Cost Q

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In long-run equilibrium produsen menemukan & memilih suatu ukuran usaha pd titik minimum LRAC Selama MR = LRMC no profit Dlm jk pendek: MR bisa > MC Setiap produsen akan menyamakan MR dg SRMC & berusaha s/d pd kondisi SRAC min. Save the firms in long-run equilibrium: min. SRAC & LRAC

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Opt: SMC=SAC=LMC=LAC SAC min LAC min LAC Q Jika produsen berpandangan bahwa tingkat Q yang memberikan ū max adalah: OQ 1 → SAC > LAC ↓ STC < LTC ↓ SMC

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Cost and Production Chapters 6 and 7.

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