Cost Function Basics Managerial EconomicsCharles W Upton K
Cost Function Basics Managerial Economics-Charles W. Upton
K Production Isoquants Q 2 Q 1 Cost Function Basics Q 3 L
K Production Isoquants Combinations of K and L giving equal (“iso”) quantities of output Q 2 Q 1 Cost Function Basics Q 3 L
K Isocost Lines Q 2 Q 1 Cost Function Basics Q 3 L
K Isocost Lines Combinations of K and L costing equal (“iso”) amounts Q 2 Q 1 Cost Function Basics Q 3 L
K Isocost Lines r. K +w. L = C 3 r. K +w. L = C 2 r. K +w. L = C 1 Q 2 Q 1 Cost Function Basics Q 3 L
K Optimal Points A B C Q 2 Q 1 Cost Function Basics Q 3 L
K The Expansion Line Q 2 Q 1 Cost Function Basics Q 3 L
K The Expansion Line The combination of K and L that minimize the costs of different levels of output. Q 2 Q 1 Cost Function Basics Q 3 L
Our Basic Cost Function • Cost is a function of output and factor prices C = C(q, r, w) Cost Function Basics
Our Basic Cost Function • Cost is a function of output and factor prices C = C(q, r, w) • We often simplify this to C = C(q) Cost Function Basics
Our Basic Cost Function • Cost is a function of output and factor prices A caution: we always C = C(q, r, w) assume • We often simplify thiswe to are finding. Cthe least cost = C(q) way of producing q. Cost Function Basics
Other Measures of Cost • Average Cost – Total Cost divided by quantity • Marginal Cost – The incremental cost of another unit Cost Function Basics
Average Cost Function Basics
Average Cost $ $ Increasing Average Cost Q $ Constant Average Cost Q Cost Function Basics Decreasing Average Cost Q
Marginal Cost Function Basics
Marginal Cost MC(q) = C(q) – C(q-1) Cost Function Basics
End © 2004 Charles W. Upton Cost Function Basics
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