farm management chapter 9 cost concepts in economics
Post on 20-Dec-2015
281 views
TRANSCRIPT
![Page 1: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/1.jpg)
Farm Management
Chapter 9Cost Concepts in Economics
![Page 2: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/2.jpg)
farm management chapter 9
2
Chapter Outline
• Opportunity Cost
• Costs
• Application of Cost Concepts
• Economies of Size
![Page 3: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/3.jpg)
farm management chapter 9
3
Chapter Objectives1. To explain the importance of opportunity cost and
its use2. To clarify the difference between short run and
long run3. To discuss the difference between fixed and
variable costs4. To identify fixed costs and show how to compute
them5. To show how to compute average costs6. To demonstrate the use of costs in short run and
long run decisions7. To explore economies of size
![Page 4: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/4.jpg)
farm management chapter 9
4
Opportunity Cost
• The value of a product not produced because an input was used for another purpose, or
• The income that could have been received if the input had been used in its most profitable alternative use
![Page 5: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/5.jpg)
farm management chapter 9
5
Everything Has an Opportunity Cost
Even if you use the input in its best possible use, there is an opportunitycost for the item you did not produce.(In this case, opportunity cost will be less than the revenue actually received.)
![Page 6: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/6.jpg)
farm management chapter 9
6
Table 9-1 Opportunity Cost of Applying Irrigation Water
Among Three Uses
irrigation water wheat sorghum cotton(acre inches) (100 acres) (100 acres) (100 acres
4 $1,200 $1,600 $1,8008 $800 $1,200 $1,500
12 $600 $800 $1,20016 $300 $500 $80020 $50 $200 $400
Marginal Value Products ($)
![Page 7: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/7.jpg)
farm management chapter 9
7
How Does Opportunity Cost Relate to the Equi-Marginal Principle?
With the Equi-Marginal Principle,we are choosing to produce one product instead of another. The opportunity cost is the revenuegiven up from the crop not produced.
![Page 8: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/8.jpg)
farm management chapter 9
8
Opportunity Cost of Operator Time
• Opportunity cost of operator's labor: What the operator could earn for that labor in best alternative use
• Opportunity cost of operator's management: Difficult to estimate
• Total of opportunity cost of labor and opportunity cost of management should not exceed total expected salary in best alternative job
![Page 9: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/9.jpg)
farm management chapter 9
9
Opportunity Cost of Capital
The opportunity cost of capital is often set equal to what the capital could earn in a no-risk savings account.
Total dollar value of the capital inputs isestimated and multiplied by the interestrate for a savings account.
![Page 10: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/10.jpg)
farm management chapter 9
10
Costs
• Total Fixed Cost (TFC)
• Average Fixed Cost (AFC)
• Total Variable Cost (TVC)
• Average Variable Cost (AVC)
• Total Cost (TC)
• Average Total Cost (ATC)
• Marginal Cost (MC)
![Page 11: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/11.jpg)
farm management chapter 9
11
Cost Concepts
These seven costs are output related.
Marginal cost is the cost of producing anadditional unit of output. The others are either the total or average costs for producing a given amount of output.
![Page 12: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/12.jpg)
farm management chapter 9
12
Short Run and Long Run
The short run is the period of time during which the quantity of one or more production inputs is fixed and cannot be changed.
The long run is the period of time in whichthe amount of all inputs can be changed.
![Page 13: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/13.jpg)
farm management chapter 9
13
Fixed Costs
• Fixed costs exist only in the short run.
• In the short run, fixed costs must be paid regardless of the amount of output produced.
• Fixed costs are not under the control of the manager in the short run.
.
![Page 14: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/14.jpg)
farm management chapter 9
14
Depreciation is a Fixed Cost
Annual depreciation using the straight-line method is:
Original Cost — Salvage Value
Useful Life
![Page 15: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/15.jpg)
farm management chapter 9
15
Interest is a Fixed Cost
Interest = r Cost + Salvage Value
2
r = the interest rate
![Page 16: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/16.jpg)
farm management chapter 9
16
Other Fixed Costs
Property taxes and insurance are also fixed costs.
Some repairs may be fixed costs, if they are for maintenance. In practice, machinery repairs are usually counted as variable costs, while building repairs are counted as fixed.
![Page 17: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/17.jpg)
farm management chapter 9
17
Computing Total Costs
• Total Fixed Cost (TFC): The sum of all fixed costs
• Total Variable Cost (TVC): The sum of all variable costs
• Total Cost (TC) = TVC + TFC
![Page 18: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/18.jpg)
farm management chapter 9
18
Average and Marginal Costs
• Average Fixed Cost (AFC): TFC/Output
• Average Variable Cost (AVC): TVC/Output
• Average Total Cost (ATC or AC): TC/Output
• Marginal Cost: TC/ Output or TVC/ Output
![Page 19: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/19.jpg)
farm management chapter 9
19
Figure 9-1 Typical total cost curves
![Page 20: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/20.jpg)
farm management chapter 9
20
Figure 9-2 Average and marginal cost curves
![Page 21: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/21.jpg)
farm management chapter 9
21
Things to Notice
• AFC always decreases
• MC may decrease at first but it eventually must increase
• AVC and ATC are typically U-shaped
• MC=AVC at minimum point of AVC
• MC = ATC at minimum point of ATC
• ATC approaches AVC from above
![Page 22: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/22.jpg)
farm management chapter 9
22
Figure 9-3 Cost curves for a diminishing marginal returns
production function
![Page 23: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/23.jpg)
farm management chapter 9
23
Figure 9-4 Cost curves when marginal product
is constant
![Page 24: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/24.jpg)
farm management chapter 9
24
Table 9-2 Illustration of Cost Concepts Applied to a
Stocking Rate Problem
Number Output MPP TFC TVC TC AFC AVC ATC MC MRof Steers Cwt Beef ($) ($) ($) ($) ($) ($) ($) ($)
0 0 *** 5,000 0 5,000 *** *** *** *** ***10 72 7.2 5,000 4,950 9,950 69.44 68.75 138.19 68.75 87.5020 148 7.6 5,000 9,900 14,900 33.78 66.89 100.68 65.13 87.5030 225 7.7 5,000 14,850 19,850 22.22 66.00 88.22 64.29 87.5040 295 7.0 5,000 19,800 24,800 16.95 67.12 84.07 70.71 87.5050 360 6.5 5,000 24,750 29,750 13.89 68.75 82.64 76.15 87.5060 420 6.0 5,000 29,700 34,700 11.90 70.71 82.62 82.50 87.5070 475 5.5 5,000 34,650 39,650 10.53 72.95 83.47 90.00 87.5080 525 5.0 5,000 39,600 44,600 9.52 75.43 84.95 99.00 87.5090 570 4.5 5,000 44,550 49,550 8.77 78.16 86.93 110.00 87.50
100 610 4.0 5,000 49,500 54,500 8.20 81.15 89.34 123.75 87.50
![Page 25: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/25.jpg)
farm management chapter 9
25
Graph of ATC, AVC, MC and AFC from Stocker Problem
Stocking Rate Problem
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
0 100 200 300 400 500 600 700cwt beef
ATC MC
AVC
AFC
![Page 26: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/26.jpg)
farm management chapter 9
26
Application of Cost Concepts
Cost concepts can be used in bothshort and long-run decision making.
![Page 27: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/27.jpg)
farm management chapter 9
27
Production Rules for the Short Run
• If Price > ATC, produce and make a profit.
• If ATC>Price>AVC produce and minimize losses.
• If AVC> Price, do not produce and limit your loss to your fixed costs.
![Page 28: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/28.jpg)
farm management chapter 9
28
Logic behind These Rules
Fixed costs must be paid whether youproduce or not in any given year. Theyare therefore irrelevant to the productiondecision. You look at variable costs. Ifyou can cover those, you should produce.If you can’t, you don’t produce.
![Page 29: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/29.jpg)
farm management chapter 9
29
Producing at a Loss Example
Fixed Costs are $10,000. At the point where MR=MC, TVC are $8,000 and TR is $12,000.
If I don’t produce, I will have a loss of _______
If I do produce, I will have a loss of _________
I should produce to minimize losses.
$10,000
$6,000
![Page 30: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/30.jpg)
farm management chapter 9
30
If Losses Exceed Fixed Costs
Fixed Costs are $10,000. At the point where MR=MC, TVC are $15,000 and TR is $12,000.
If I don’t produce, I will have a loss of _______
If I do produce, I will have a loss of _________
I should not produce
$10,000
$13,000
.
![Page 31: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/31.jpg)
farm management chapter 9
31
Figure 9-5 Illustration of short-run production decisions
![Page 32: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/32.jpg)
farm management chapter 9
32
Don’t Produce: Graphical View
MC
AVC
Output
ATC
MR = Priceloses more thanfixed cost
![Page 33: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/33.jpg)
farm management chapter 9
33
Produce at a Loss: Graphical View
MC
AVC
Output
ATC
MR = Price
loses less thanfixed cost
![Page 34: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/34.jpg)
farm management chapter 9
34
Produce at a Profit: Graphical View
MC
AVC
Output
ATC
MR = Price
per-unit profit
![Page 35: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/35.jpg)
farm management chapter 9
35
Production Rules for the Long Run
• Price > ATC. Continue to produce at the point where MR=MC.
• Price < ATC. Stop production and sell fixed assets.
![Page 36: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/36.jpg)
farm management chapter 9
36
Economies of Size
• What is the most profitable farm size?
• Can larger farms produce food and fiber more cheaply?
• Are large farms more efficient?
• Will family farms disappear and be replaced by corporate farms?
• Will farm numbers continue to fall?
![Page 37: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/37.jpg)
farm management chapter 9
37
Figure 9-6Farm size in the short run
![Page 38: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/38.jpg)
farm management chapter 9
38
Measuring Economies of Size
Percent Change in CostsPercent Change in Output Value
Ratio value Type of costs
< 1 Decreasing= 1 Constant> 1 Increasing
![Page 39: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/39.jpg)
farm management chapter 9
39
Figure 9-7Possible size-cost relations
![Page 40: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/40.jpg)
farm management chapter 9
40
Causes of Economies of Size
• Full utilization of existing resources
• Technology
• Use of specialized resources
• Decreasing input prices
• Higher output prices
• Management
![Page 41: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/41.jpg)
farm management chapter 9
41
Causes of Diseconomies of Size
• Management
• Labor supervision
• Geographical dispersion
• Special problems of large livestock operations
![Page 42: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/42.jpg)
farm management chapter 9
42
Figure 9-8Two possible LRAC curves
![Page 43: Farm Management Chapter 9 Cost Concepts in Economics](https://reader033.vdocuments.site/reader033/viewer/2022061422/56649d415503460f94a1c02f/html5/thumbnails/43.jpg)
farm management chapter 9
43
Summary
This chapter discussed the differenteconomic costs and their use inmanagerial decision making. An analysis of costs is important for understanding and improving the profitability of a business. An understanding of costs is also necessary for analyzing economies of size.