13 The Costs of Production P R I N C I P L E S O F F O U R T H E D I T I O N This chapter is very technical and full of definitions and graphs. Most of the material is not very analytical. But it may be harder for some students to see the relevance of this material. So, this PowerPoint begins with a short brainstorming activity on the next slide. This activity asks students to think of several costs that a real-world firm actually faces, and the kinds of decisions that are affected by these costs. Having realized that costs are important to business decisions, students should be more motivated to learn the concepts in this chapter. It might also be worthwhile to point out that material in this chapter provides the foundation for the following four chapters. In those four chapters, we will see how firms in different market structures use the cost concepts introduced here to make decisions about how much stuff to produce, what price to charge, and so forth. Learning that material will be much easier for students if they have a good grasp of the material in this chapter.

In this chapter, look for the answers to these questions: Apa yang dimaksud fungsi produksi? Apa yang dimaksud marginal product? Bagaimana hubungan keduanya? Apa yang dimaksud various costs, dan bagaimana hubungannya pada setiap cost dan kepada output? Bagaimana perbedaan biaya jangka pendek dan jangka panjang? Apa yang dimaksud dengan “economies of scale”? CHAPTER 13 THE COSTS OF PRODUCTION

Total Revenue, Total Cost, Profit Kita mengasumsikan bahwa tujuan perusahaan adalah memaksimumkan profit. Profit = Total revenue – Total cost CHAPTER 13 THE COSTS OF PRODUCTION

Costs: Explicit vs. Implicit Explicit costs – membutuhkan uang yang keluar (penggunaan kas), contoh membayar upah tenaga kerja. Implicit costs – tidak membutuhkan uang yang keluar dari kas, contoh opportunity cost dari owner’s time Remember one of the Ten Principles: The cost of something is what you give up to get it. Kedua jenis biaya tersebut penting untuk keputusan perusahaan. CHAPTER 13 THE COSTS OF PRODUCTION

Explicit vs. Implicit Costs: An Example Seseorang membutuhkan $100,000 untuk memulai bisnisnya. Suku bunga sebesar 5%. Case 1: pinjam sebesar $100,000 explicit cost = $5000 interest on loan Case 2: individu menggunakan $40,000 dari tabungannya, kemudian meminjam sebesar $60,000 explicit cost = $3000 (5%) interest on the loan implicit cost = $2000 (5%) foregone interest you could have earned on your $40,000. In Case 2, the foregone interest is the interest you could have earned on your savings. It is an opportunity cost. This example shows that an important implicit cost is the cost of capital, the foregone returns you could have earned had you used your savings to buy bonds or other assets instead of investing them in your business. The hope is that students will see that what really matters to them is not just the explicit costs, but total (implicit + explicit) costs. Dalam kedua kasus tersebut total (exp + imp) costs adalah $5000. CHAPTER 13 THE COSTS OF PRODUCTION

Economic Profit vs. Accounting Profit Accounting profit = total revenue dikurangi total explicit costs Economic profit = total revenue dikurangi total costs ( termasuk biaya explicit and implicit) Accounting profit mengabaikan implicit costs, maka profitnya akan lebih besar dibangding dengan economic profit. Accountants keep track of how much money flows into and out of the firm, so they ignore implicit costs. Economists study the pricing and production decisions of firm, which are affected by implicit as well as explicit costs. CHAPTER 13 THE COSTS OF PRODUCTION

The Production Function Production function menunjukan hubungan antara banyaknya input yang digunakan untuk produksi dan kuantitas output. production function dapat ditunjukan melalui table, persamaan, atau grafik. In the following slides, Example 1 will be used to illustrate the production function, marginal product, and a first look at the costs of production. CHAPTER 13 THE COSTS OF PRODUCTION

Example 1: Farmer Jack’s Production Function 500 1,000 1,500 2,000 2,500 3,000 1 2 3 4 5 No. of workers Quantity of output Q (bushels of wheat) L (no. of workers) 1000 1 1800 2 2400 3 2800 4 3000 5 CHAPTER 13 THE COSTS OF PRODUCTION

Marginal Product Marginal product dari suatu input, adalah peningkatan output karena adanya tambahan penggunaan input. Dengan menganggap semua input lain konstan. Contoh: jika Farmer Jack memperkerjakan satu lagi pekerja, outputnya meningkat melalui marginal product of labor. Notation: ∆ (delta) = “change in…” Examples: ∆Q = change in output, ∆L = change in labor Marginal product of labor (MPL) = ∆Q ∆L CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 1: Total & Marginal Product 3000 5 2800 4 2400 3 1800 2 1000 1 Q (bushels of wheat) L (no. of workers) MPL ∆Q = 1000 ∆L = 1 1000 ∆Q = 800 ∆L = 1 800 ∆Q = 600 ∆L = 1 600 ∆Q = 400 ∆L = 1 400 ∆Q = 200 ∆L = 1 200 CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 1: MPL = Slope of Prod Function 500 1,000 1,500 2,000 2,500 3,000 1 2 3 4 5 No. of workers Quantity of output L (no. of workers) Q (bushels of wheat) MPL MPL equals the slope of the production function. Notice that MPL diminishes as L increases. This explains why the production function gets flatter as L increases. 1000 1 1000 800 2 1800 600 3 2400 400 4 2800 200 5 3000 CHAPTER 13 THE COSTS OF PRODUCTION

Why MPL Is Important Recall one of the Ten Principles: Rational people think at the margin. Ketika Jack menambah pekerja, Cost yang akan dihadapinya meningkat karena membayar upah pekerja yang lebih banyak. Outputnya akan meningkat melalui MPL Mempertimbangkan kedua hal tersebut membantu Jack untuk memutuskan apakah ia akan mendapat benefit dari menambah pekerja. Thinking at the margin helps not only Jack, but all managers in the real world, who make business decisions every day by comparing marginal costs with marginal benefits. CHAPTER 13 THE COSTS OF PRODUCTION

Why MPL Diminishes Diminishing marginal product: marginal product dari suatu input menurun ketika penggunaan input meningkat.(other things equal) Contoh output meningkat semakin kecil dan semakin kecil untuk setiap tambahan pekerja. Mengapa? Jika Jack meningkatkan pekerja tapi lahan tetap, maka rata-rata pekerja memiliki lahan yang lebih sedikit untuk digarap, maka akan menjadi kurang produktif. Pada umumnya, MPL diminishes ketika L meningkat mesikpun fixed input land or capital (equipment, machines, etc.). CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 1: Farmer Jack’s Costs Jack harus membayar $1000/bulan untuk lahan (tanah), terlepas dari berapa banyak gandum yang dihasilkan Upah untuk setiap pekerja adalah $2000/bln month. CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 1: Farmer Jack’s Costs L (no. of workers) Q (bushels of wheat) cost of land cost of labor Total Cost $1,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 1 1000 2 1800 3 2400 4 2800 5 3000 CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 1: Farmer Jack’s Total Cost Curve Q (bushels of wheat) Total Cost $1,000 1000 $3,000 1800 $5,000 2400 $7,000 2800 $9,000 3000 $11,000 CHAPTER 13 THE COSTS OF PRODUCTION

Marginal Cost Marginal Cost (MC) adalah peningkatan Total Cost dari adanya tambahan produksi satu satuan unit: ∆TC ∆Q MC = CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 1: Total and Marginal Cost $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 Total Cost 3000 2800 2400 1800 1000 Q (bushels of wheat) Marginal Cost (MC) ∆Q = 1000 ∆TC = $2000 $2.00 ∆Q = 800 ∆TC = $2000 $2.50 ∆Q = 600 ∆TC = $2000 $3.33 ∆Q = 400 ∆TC = $2000 $5.00 ∆Q = 200 ∆TC = $2000 $10.00 CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 1: The Marginal Cost Curve Q (bushels of wheat) TC MC MC usually rises as Q rises, as in this example. $1,000 $10.00 $5.00 $3.33 $2.50 $2.00 1000 $3,000 1800 $5,000 2400 $7,000 2800 $9,000 3000 $11,000 CHAPTER 13 THE COSTS OF PRODUCTION

Why MC Is Important Farmer Jack is rational dan menginginkan untuk maksimum profitnya. Untuk meningkatkan profit, haruskah ia produksi lebih banyak gandum, atau lebih sedikit? Untuk menemukan jawaban, Farmer Jack perlu untuk “think at the margin.” Jika tambahan biaya produksi gandum (MC) lebih kecil dari tambahan pendapatan yang ia dapat dari setiap menjual gandumnya, maka profit Jack meningkat jika ia produksi lebih banyak gandum. CHAPTER 13 THE COSTS OF PRODUCTION

Fixed and Variable Costs Fixed costs (FC) – do not vary with the quantity of output produced. For Farmer Jack, FC = $1000 for his land Other examples: cost of equipment, loan payments, rent Variable costs (VC) – vary with the quantity produced. For Farmer Jack, VC = wages he pays workers Other example: cost of materials Total cost (TC) = FC + VC CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2 Contoh kedua lebih umum dapat dilakukan untuk semua jenis perusahaan atau unit bisnis. CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2: Costs Q FC VC TC 100 $100 520 380 280 210 160 120 70 $0 620 $800 FC Q FC VC TC VC $700 100 $100 520 380 280 210 160 120 70 $0 620 480 380 310 260 220 170 $100 TC $600 1 $500 2 Costs $400 3 $300 4 $200 5 Point out that the TC curve is parallel to the VC curve, but is higher by the amount FC. $100 6 $0 7 1 2 3 4 5 6 7 Q CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2: Marginal Cost Q TC MC Recall, Marginal Cost (MC) is the change in total cost from producing one more unit: $100 $70 1 170 ∆TC ∆Q MC = 50 2 220 40 3 260 Usually, MC rises as Q rises, due to diminishing marginal product. Sometimes (as here), MC falls before rising. (In other examples, MC may be constant.) 50 4 310 70 5 380 100 6 480 140 7 620 CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2: Average Fixed Cost Q FC AFC Average fixed cost (AFC) is fixed cost divided by the quantity of output: AFC = FC/Q $100 14.29 16.67 20 25 33.33 50 $100 n.a. 1 100 2 100 3 100 Notice that AFC falls as Q rises: The firm is spreading its fixed costs over a larger and larger number of units. 4 100 5 100 Most students readily grasp the following example. Suppose FC = $1 million for a factory that produces cars. If the firm produces Q = 1 car, then AFC = $1 million. If the firm produces 2 cars, AFC = $500,000. If the firm produces 5 cars, AFC = $200,000. If the firm produces 100 cars, AFC = $10,000. The more cars produced at the factory, the smaller is the cost of the factory per car. 6 100 7 100 CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2: Average Variable Cost Q VC AVC Average variable cost (AVC) is variable cost divided by the quantity of output: AVC = VC/Q $0 74.29 63.33 56.00 52.50 53.33 60 $70 n.a. 1 70 2 120 3 160 As Q rises, AVC may fall initially. In most cases, AVC will eventually rise as output rises. 4 210 5 280 6 380 7 520 CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2: Average Total Cost Average total cost (ATC) sama dengan total cost dibagi dengan jumlah output: ATC = TC/Q Q TC ATC 74.29 14.29 63.33 16.67 56.00 20 52.50 25 53.33 33.33 60 50 $70 $100 n.a. AVC AFC $100 88.57 80 76 77.50 86.67 110 $170 n.a. 1 170 2 220 3 260 atau, ATC = AFC + AVC 4 310 5 Many students have heard the terms “cost per unit” or “unit cost” in other business courses. ATC means the same thing. 380 6 480 7 620 CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2: Average Total Cost $0 $25 $50 $75 $100 $125 $150 $175 $200 1 2 3 4 5 6 7 Q Costs Q TC ATC Usually, as in this example, the ATC curve is U-shaped. $100 n.a. 1 170 $170 2 220 110 3 260 86.67 4 310 77.50 5 380 76 6 480 80 7 620 88.57 CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2: The Various Cost Curves Together $0 $25 $50 $75 $100 $125 $150 $175 $200 1 2 3 4 5 6 7 Q Costs ATC AVC AFC MC CHAPTER 13 THE COSTS OF PRODUCTION

A C T I V E L E A R N I N G 3: Costs Fill in the blank spaces of this table. Q VC TC AFC AVC ATC MC $50 n.a. n.a. n.a. $10 1 10 $10 $60.00 2 30 80 30 3 16.67 20 36.67 4 100 150 12.50 37.50 5 150 30 60 6 210 260 8.33 35 43.33 29

A C T I V E L E A R N I N G 3: Answers Use AVC = VC/Q First, deduce FC = $50 and use FC + VC = TC. Use AFC = FC/Q Use relationship between MC and TC Use ATC = TC/Q Q VC TC AFC AVC ATC MC $0 $50 n.a. n.a. n.a. $10 1 10 60 $50.00 $10 $60.00 20 2 30 80 25.00 15 40.00 30 3 60 110 16.67 20 36.67 40 4 100 150 12.50 25 37.50 50 5 150 200 10.00 30 40.00 60 6 210 260 8.33 35 43.33 30

EXAMPLE 2: Why ATC Is Usually U-Shaped $0 $25 $50 $75 $100 $125 $150 $175 $200 1 2 3 4 5 6 7 Q Costs ketika Q meningkat: awalnya, AFC menurun mendorong ATC ke bawah. Dan pada akhirnya, kenaikan AVC mendorong ATC ke atas. CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 2: ATC and MC ketika MC < ATC, ATC ATC menurun. $0 $25 $50 $75 $100 $125 $150 $175 $200 1 2 3 4 5 6 7 Q Costs ketika MC < ATC, ATC menurun. ketika MC > ATC, ATC meningkat. Kurva MC memotong kurva ATC pada ATC minimum. ATC MC The textbook gives a nice analogy to help students understand this. A student’s GPA is like ATC. The grade she earns in her next course is like MC. If her next grade (MC) is less than her GPA (ATC), then her GPA will fall. If her next grade (MC) is greater than her GPA (ATC), then her GPA will rise. I suggest letting students read the GPA example in the book, and giving them the following example in class: You run a pizza joint. You’re producing 100 pizzas per night, and your cost per pizza (ATC) is $3. The cost of producing one more pizza (MC) is $2. If you produce this pizza, what happens to ATC? Most students will understand immediately that ATC falls (albeit by a small amount). Instead, suppose the cost of producing one more pizza (MC) is $4. Then, producing this additional pizza causes ATC to rise. CHAPTER 13 THE COSTS OF PRODUCTION

Costs in the Short Run & Long Run Short run: beberapa input adalah fixed (e.g., factories, land). Maka biaya dari input terebut adalah FC. Long run: semua input dalam jangka panjang adalah berubah ubah. (e.g., firms can build more factories, or sell existing ones) Dalam jangka panjang, ATC pada Q tertentu adalah biaya per unit is cost per unit (e.g., the factory size with the lowest ATC). CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 3: LRATC with 3 factory Sizes Perusahaan dapat memilih dari 3 factory sizes: S, M, L. Each size has its own SRATC curve. Perusahaan dapat merubah factory size dalam jangka panjang, tapi tidak dalam jangka pendek. Q Avg Total Cost ATCS ATCM ATCL CHAPTER 13 THE COSTS OF PRODUCTION

EXAMPLE 3: LRATC with 3 factory Sizes Q Avg Total Cost Untuk memproduksi kurang dari QA, perusahaan akan memilih size S dalam jangka panjang. Produksi antara QA dan QB, akan memilih size M dalam jangka panjang. Produksi lebih dari QB, akan memilih size L dalam jangka panjang. ATCS ATCM ATCL LRATC QA QB The following might be helpful: After the first paragraph displays, pick a Q a little to the left of QA. From this Q, go up to the ATC curves. Notice that cost per unit is lower for the small factory than the medium one. The firm may be stuck with a medium factory in the short run, but in the long run – if it wishes to produce this level of output – it will choose the small factory to have the lowest cost per unit. Hence, for Q < QA, the LRATC curve is the portion of ATCS from 0 to QA. After the second paragraph displays, pick a Q a little to the right of QA. From this Q, go up to the ATC curves. Notice that cost per unit is lower for the medium factory than the small one. The firm may be stuck with a small factory in the short run, but in the long run – if it wishes to produce this level of output – it will choose the medium factory to have the lowest cost per unit. Hence, for QA < Q < QB, the LRATC curve is the portion of ATCM from QB to QA. The same type of argument illustrates the logic in the third paragraph. CHAPTER 13 THE COSTS OF PRODUCTION

A Typical LRATC Curve Dalam dunia nyata, pabrik dalam berbagai ukuran, masing-masing dengan kurva SRATCnya sendiri, Jadi kurva LRATC terlihat seperti ini: Q ATC LRATC CHAPTER 13 THE COSTS OF PRODUCTION

How ATC Changes As the Scale of Production Changes Economies of scale: ATC menurun ketika Q meningkat. Constant returns to scale: ATC tetap sama ketika Q meningkat. Diseconomies of scale: ATC meningkat ketika Q meningkat. Q ATC LRATC CHAPTER 13 THE COSTS OF PRODUCTION

How ATC Changes As the Scale of Production Changes Economies of scale terjadi ketika meningkatnya produksi memungkinkan spesialisasi yang lebih besar: pekerja lebih efisien ketika bekerja More common when Q is low. Diseconomies of scale disebabkan karena ada masalah koordinasi dalam suatu organisasi besar. Contoh: pengendalian biaya yang buruk More common when Q is high. CHAPTER 13 THE COSTS OF PRODUCTION

CONCLUSION Biaya sangat penting dalam keputusan bisnis, termasuk produksi, harga, dan hiring. Bab ini telah memaparkan konsep various cost. Bab-bab berikut akan menunjukkan bagaimana perusahaan menggunakan konsep tersebut untuk memaksimalkan keuntungan dalam berbagai struktur pasar. CHAPTER 13 THE COSTS OF PRODUCTION

CHAPTER SUMMARY Biaya implisit tidak melibatkan pengeluaran kas, namun sama pentingnya dengan biaya eksplisit untuk keputusan bisnis, Accounting profitrevenue dikurangi explicit costs. Economic profitrevenue dikurangi total (explicit + implicit) costs. Fungsi produksi menunjukkan hubungan antara output dan inputs. CHAPTER 13 THE COSTS OF PRODUCTION

CHAPTER SUMMARY The marginal product of labor adalah peningkatan output karena adanya tambahan satu lagi input labor, dengan menganggap input lain tetap. Marginal product biasanya menurun seiring meningkatnya penggunaan input. Dengan demikian, sesuai dengan pertumbuhan output, fungsi produksi akan menjadi lebih datar, dan kurva biaya total menjadi curam. Biaya variabel bervariasi seiring dengan perubahan output, biaya tetap tidak. CHAPTER 13 THE COSTS OF PRODUCTION

CHAPTER SUMMARY Marginal cost adalah peningkatan pada total cost dari adanya tambahan unit produksi. Kurva MC selalu upward-sloping. Average variable cost adalah variable cost dibagi dengan output. Average fixed cost adalah fixed cost dibagi dengan output. AFC selalu menurun ketika output meningkat. Average total cost (“cost per unit”) adalah total cost dibagi dengan jumlah dari output. Kurva ATC selalu U-shaped. CHAPTER 13 THE COSTS OF PRODUCTION

CHAPTER SUMMARY The MC curve intersects the ATC curve at minimum average total cost. When MC < ATC, ATC falls as Q rises. When MC > ATC, ATC rises as Q rises. In the long run, all costs are variable. Economies of scale: ATC falls as Q rises. Diseconomies of scale: ATC rises as Q rises. Constant returns to scale: ATC remains constant as Q rises. CHAPTER 13 THE COSTS OF PRODUCTION

The Complete Data for Example 2 Q FC VC TC AFC AVC ATC MC $100 $0 $100 n.a. n.a. n.a. $70 1 100 70 170 $100 $70 $170 50 2 100 120 220 50 60 110 40 3 100 160 260 33.33 53.33 86.67 50 4 100 210 310 25 52.50 77.50 70 5 100 280 380 20 56.00 76 100 This slide is not intended to be part of the presentation. 6 100 380 480 16.67 63.33 80 140 7 100 520 620 14.29 74.29 88.57 200 8 100 720 820 12.50 90 102.50 CHAPTER 13 THE COSTS OF PRODUCTION