Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 21: Cost Minimisation, see formula page for calc! - Coggle Diagram
Chapter 21: Cost Minimisation
COST MINIMISATION
If a firm is not minimising costs, it is not maximising profit
Formula: see formula page
the solution to the cost minimising problem (the min costs to produce the desired level of output) will depend on the
cost function
c(w1,w2,y), which measures the
minimal costs of producing y units of output
when the factor prices are w1 & w2
ISOCOST LINES
Lines which show all combinations of inputs that have some level of cost,
C
C = w1x1 + w2x2
When we change level of
C (cost)
we get a family of isocost lines
.
Every point on the isocost line has the
same cost
&
Higher isocost lines have higher costs
The higher the C, the higher the isocost line
TANGENCY CONDITION
Point of tangency on isocost line is the optimal choice isoquant, where costs are minimised
"Point where you can use the isocost line to produce 'isoquant formula' of output"
CONDITIONAL FACTOR DEMAND FUNCTION
The choices of inputs that yield minimal costs for the firm will in general depend on the input prices and the level of output the firm wants to produce. This is called the conditional factor demand function or derived factor demand: π₯1 (π€1,π€2,π¦) and π₯2 (π€1,π€2,π¦).
.
Separates
optimal level of output from cost effective method of production
COSTS
SHORT RUN
Remember short run is period where one factor of production must be fixed
Short run cost function is the minimum cost to produce a given level of output, only adjusting the variable factors of production
LONG RUN
period where all factors of production can be changed
Long run cost function is the minimum cost of producing a given level of output
RELATIONSHIP BETWEEN SHORT RUN & LONG RUN COST FUNCTIONS
The minimum costs when all factors are variable is the minimum cost when factor 2 is fixed at the minimised long run cost level
.
The cost minimising amount of the variable factor in the long run is the amount the firm would choose in the short run
see slide 11 and formula page
RETURNS TO SCALE
see slide 12
COSTS
FIXED COSTS
costs associated with fixed factors (independent of output) and must be paid regardless of whether there is output or not. (e.g office rent)
QUASI FIXED COSTS
costs also independent of output but only need to be paid if the firm produces a positive amount of output (e.g electricity usage per unit produced)
there are no fixed costs in the long run but there can be quasi fixed costs in the long run
if it is necessary to spend a fixed amount of money before you can produce any output then quasi costs are present
SUNK COSTS
costs that are not recoverable
e.g when you paint your office building, your sunk cost is the paint as you can't get it back
see formula page for calc!