微观经济学（第八版-英文）课件：The Cost of Production

7.1

MeasuringCost:WhichCostsMatter?7.2

CostsintheShortRun7.3

CostsintheLongRun7.4

Long-RunversusShort-RunCostCurves7.5

ProductionwithTwoOutputs—EconomiesofScope7.6

DynamicChangesinCosts—TheLearningCurve7.7 EstimatingandPredictingCost Appendix:ProductionandCostTheory—AMathematicalTreatment

TheCostof

ProductionCHAPTEROUTLINEMeasuringCost:WhichCostsMatter?7.1EconomicCostversusAccountingCost●

accountingcost

Actualexpensesplusdepreciationchargesforcapitalequipment.Economiccost=Opportunitycost●

economiccost

Costtoafirmofutilizingeconomicresourcesinproduction.OpportunityCost●

opportunitycost

Costassociatedwithopportunitiesforgonewhenafirm’sresourcesarenotputtotheirbestalternativeuse.Theconceptofopportunitycostisparticularlyusefulinsituationswherealternativesthatareforgonedonotreflectmonetaryoutlays.SunkCosts●

sunkcost

Expenditurethathasbeenmadeandcannotberecovered.Becauseasunkcostcannotberecovered,itshouldnotinfluencethefirm’sdecisions.Forexample,considerthepurchaseofspecializedequipmentforaplant.Supposetheequipmentcanbeusedtodoonlywhatitwasoriginallydesignedforandcannotbeconvertedforalternativeuse.Theexpenditureonthisequipmentisasunkcost.Becauseithasnoalternativeuse,itsopportunitycostiszero.Thusitshouldnotbeincludedaspartofthefirm’seconomiccosts.Aprospectivesunkcostisaninvestment.Herethefirmmustdecidewhetherthatinvestmentinspecializedequipmentiseconomical.TheNorthwesternUniversityLawSchoolhaslongbeenlocatedinChicago,alongtheshoresofLakeMichigan.However,themaincampusoftheuniversityislocatedinthesuburbofEvanston.Inthemid-1970s,thelawschoolbeganplanningtheconstructionofanewbuilding.Thedowntownlocationhadmanyprominentsupporters.Theyarguedinpartthatitwascost-effectivetolocatethenewbuildinginthecitybecausetheuniversityalreadyownedtheland.AlargeparceloflandwouldhavetobepurchasedinEvanstonifthebuildingweretobebuiltthere.Doesthisargumentmakeeconomicsense?No.Itmakesthecommonmistakeoffailingtoappreciateopportunitycost.Fromaneconomicpointofview,itisveryexpensivetolocatedowntownbecausetheopportunitycostofthevaluablelakeshorelocationishigh:ThatpropertycouldhavebeensoldforenoughmoneytobuytheEvanstonlandwithsubstantialfundsleftover.Intheend,NorthwesterndecidedtokeepthelawschoolinChicago.Thiswasacostlydecision.ItmayhavebeenappropriateiftheChicagolocationwasparticularlyvaluabletothelawschool,butitwasinappropriateifitwasmadeonthepresumptionthatthedowntownlandhadnocost.EXAMPLE7.1CHOOSINGTHELOCATIONFORANEWLAWSCHOOLBUILDINGFixedCostsandVariableCosts●

totalcost(TCorC)

Totaleconomiccostofproduction,consisting

offixedandvariablecosts.●

fixedcost(FC)Costthatdoesnotvarywiththelevelofoutputandthatcanbeeliminatedonlybyshuttingdown.●

variablecost(VC)Costthatvariesasoutputvaries.Fixedcostdoesnotvarywiththelevelofoutput—itmustbepaidevenifthereisnooutput.Theonlywaythatafirmcaneliminateitsfixedcostsisbyshuttingdown.Byreducingtheoutputofthatfactorytozero,thecompanycouldeliminatethecostsofrawmaterialsandmuchofthelabor,butitwouldstillincurthefixedcostsofpayingthefactory’smanagers,securityguards,andongoingmaintenance.Theonlywaytoeliminatethosefixedcostswouldbetoclosethedoors,turnofftheelectricity,andperhapsevensellofforscrapthemachinery.SHUTTINGDOWNShuttingdowndoesn’tnecessarilymeangoingoutofbusiness.FIXEDORVARIABLE?Howdoweknowwhichcostsarefixedandwhicharevariable?Overaveryshorttimehorizon—say,afewmonths—mostcostsarefixed.Oversuchashortperiod,afirmisusuallyobligatedtopayforcontractedshipmentsofmaterials.Overaverylongtimehorizon—say,tenyears—nearlyallcostsarevariable.Workersandmanagerscanbelaidoff(oremploymentcanbereducedbyattrition),andmuchofthemachinerycanbesoldoffornotreplacedasitbecomesobsoleteandisscrapped.FixedversusSunkCostsShuttingdowndoesn’tnecessarilymeangoingoutofbusiness.Fixedcostscanbeavoidedifthefirmshutsdownaplantorgoesoutofbusiness.Sunkcosts,ontheotherhand,arecoststhathavebeenincurredandcannotberecovered.Whenafirm’sequipmentistoospecializedtobeofuseinanyotherindustry,mostifnotallofthisexpenditureissunk,i.e.,cannotberecovered.Whydistinguishbetweenfixedandsunkcosts?Becausefixedcostsaffectthefirm’sdecisionslookingforward,whereassunkcostsdonot.Fixedcoststhatarehighrelativetorevenueandcannotbereducedmightleadafirmtoshutdown—eliminatingthosefixedcostsandearningzeroprofitmightbebetterthanincurringongoinglosses.Incurringahighsunkcostmightlaterturnouttobeabaddecision(forexample,theunsuccessfuldevelopmentofanewproduct),buttheexpenditureisgoneandcannotberecoveredbyshuttingdown.Ofcourseaprospectivesunkcostisdifferentand,aswementionedearlier,wouldcertainlyaffectthefirm’sdecisionslookingforward.AMORTIZINGSUNKCOSTS●

amortization

Policyoftreatingaone-timeexpenditureasanannualcostspreadoutoversomenumberofyears.Amortizinglargecapitalexpendituresandtreatingthemasongoingfixedcostscansimplifytheeconomicanalysisofafirm’soperation.Aswewillsee,forexample,treatingcapitalexpendituresthiswaycanmakeiteasiertounderstandthetradeoffthatafirmfacesinitsuseoflaborversuscapital.Forsimplicity,wewillusuallytreatsunkcostsinthiswayasweexaminethefirm’sproductiondecisions.Whendistinguishingsunkfromfixedcostsdoesbecomeessentialtotheeconomicanalysis,wewillletyouknow.Itisimportanttounderstandthecharacteristicsofproductioncostsandtobeabletoidentifywhichcostsarefixed,whicharevariable,andwhicharesunk.Goodexamplesincludethepersonalcomputerindustry(wheremostcostsarevariable),thecomputersoftwareindustry(wheremostcostsaresunk),andthepizzeriabusiness(wheremostcostsarefixed).Becausecomputersareverysimilar,competitionisintense,andprofitabilitydependsontheabilitytokeepcostsdown.Mostimportantarethecostofcomponentsandlabor.Asoftwarefirmwillspendalargeamountofmoneytodevelopanewapplication.Thecompanycanrecoupitsinvestmentbysellingasmanycopiesoftheprogramaspossible.Forthepizzeria,sunkcostsarefairlylowbecauseequipmentcanberesoldifthepizzeriagoesoutofbusiness.Variablecostsarelow—mainlytheingredientsforpizzaandperhapswagesforaworkerstoproduceanddeliverpizzas.EXAMPLE7.2SUNK,FIXED,ANDVARIABLECOSTS:COMPUTERS,SOFTWARE,ANDPIZZASMarginalandAverageCostTABLE7.1AFIRM’SCOSTSRATEOFOUTPUT(UNITSPERYEAR)FIXEDCOST(DOLLARSPERYEAR)VARIABLECOST(DOLLARSPERYEAR)TOTALCOST(DOLLARSPERYEAR)MARGINALCOST(DOLLARSPERUNIT)AVERAGEFIXEDCOST(DOLLARSPERUNIT)AVERAGEVARIABLECOST(DOLLARSPERUNIT)AVERAGETOTALCOST(DOLLARSPERUNIT)(FC)(1)(VC)(2)(TC)(3)(MC)(4)(AFC)(5)(AVC)(6)(ATC)(7)050050————150501005050501002507812828253964350981482016.732.749.34501121621412.52840.555013018018102636650150200208.32533.3750175225257.12532.1850204254296.325.531.8950242292385.626.932.4105030035058530351150385435854.53539.5MARGINALCOST(MC)●

marginalcost(MC)

Increaseincostresultingfromtheproductionofoneextraunitofoutput.Becausefixedcostdoesnotchangeasthefirm’slevelofoutputchanges,marginalcostisequaltotheincreaseinvariablecostortheincreaseintotalcostthatresultsfromanextraunitofoutput.WecanthereforewritemarginalcostasAVERAGETOTALCOST(ATC)●

averagetotalcost(ATC)Firm’stotalcostdividedbyitslevelofoutput.●

averagefixedcost(AFC)Fixedcostdividedbythelevelofoutput.●

averagevariablecost(AVC)Variablecostdividedbythelevelofoutput.

CostsintheShortRun7.2TheDeterminantsofShort-RunCostThechangeinvariablecostistheper-unitcostoftheextralaborwtimestheamountofextralaborneededtoproducetheextraoutputΔL.BecauseΔVC=wΔL,itfollowsthatTheextralaborneededtoobtainanextraunitofoutputisΔL/Δq=1/MPL.Asaresult,(7.1)DIMINISHINGMARGINALRETURNSANDMARGINALCOSTDiminishingmarginalreturnsmeansthatthemarginalproductoflabordeclinesasthequantityoflaboremployedincreases.Asaresult,whentherearediminishingmarginalreturns,marginalcostwillincreaseasoutputincreases.

TheShapesoftheCostCurvesCOSTCURVESFORAFIRMFIGURE7.1In(a)totalcostTCistheverticalsumoffixedcostFCandvariablecostVC.In(b)averagetotalcostATCisthesumofaveragevariablecostAVCandaveragefixedcostAFC.MarginalcostMCcrossestheaveragevariablecostandaveragetotalcostcurvesattheirminimumpoints.THEAVERAGE-MARGINALRELATIONSHIPMarginalandaveragecostsareanotherexampleoftheaverage-marginalrelationshipdescribedinChapter6(withrespecttomarginalandaverageproduct).BecauseaveragetotalcostisthesumofaveragevariablecostandaveragefixedcostandtheAFCcurvedeclineseverywhere,theverticaldistancebetweentheATCandAVCcurvesdecreasesasoutputincreases.TOTALCOSTASAFLOWTotalcostisaflow:thefirmproducesacertainnumberofunitsperyear.Thusitstotalcostisaflow—forexample,somenumberofdollarsperyear.Forsimplicity,wewilloftendropthetimereference,andrefertototalcostindollarsandoutputinunits.Knowledgeofshort-runcostsisparticularlyimportantforfirmsthatoperateinanenvironmentinwhichdemandconditionsfluctuateconsiderably.Ifthefirmiscurrentlyproducingatalevelofoutputatwhichmarginalcostissharplyincreasing,andifdemandmayincreaseinthefuture,managementmightwanttoexpandproductioncapacitytoavoidhighercosts.Theproductionofaluminumbeginswiththeminingofbauxite.Theprocessusedtoseparatetheoxygenatomsfromaluminumoxidemolecules,calledsmelting,isthemostcostlystepinproducingaluminum.Theexpenditureonasmeltingplant,althoughsubstantial,isasunkcostandcanbeignored.Fixedcostsarerelativelysmallandcanalsobeignored.EXAMPLE7.3THESHORT-RUNCOSTOFALUMINUMSMELTINGTABLE7.2PRODUCTIONCOSTSFORALUMINUMSMELTING($/TON)(BASEDONANOUTPUTOF600TONS/DAY)PER-TONCOSTSTHATARECONSTANTFORALLOUTPUTLEVELSOUTPUT600TONS/DAYOUTPUT600TONS/DAYElectricity$316$316Alumina369369Otherrawmaterials125125Plantpowerandfuel1010Subtotal$820$820PER-TONCOSTSTHATINCREASEWHEN

OUTPUTEXCEENDS600TONS/DAYLabor$150$225Maintenance120180Freight5075Subtotal$320$480Totalper-tonproductioncosts$1140$1300Foranoutputqupto600tonsperday,totalvariablecostis$1140q,somarginalcostandaveragevariablecostareconstantat$1140perton.Ifweincreaseproductionbeyond600tonsperdaybymeansofathirdshift,themarginalcostoflabor,maintenance,andfreightincreasesfrom$320pertonto$480perton,whichcausesmarginalcostasawholetoincreasefrom$1140pertonto$1300perton.Whathappenstoaveragevariablecostwhenoutputisgreaterthan600tonsperday?Whenq>600,totalvariablecostisgivenby:THESHORT-RUNVARIABLECOSTSOFALUMINUMSMELTINGFIGURE7.2Theshort-runaveragevariablecostofsmeltingisconstantforoutputlevelsusinguptotwolaborshifts.Whenathirdshiftisadded,marginalcostandaveragevariablecostincreaseuntilmaximumcapacityisreached.

Thereforeaveragevariablecostis

EXAMPLE7.3THESHORT-RUNCOSTOFALUMINUMSMELTINGCostintheLongRun7.3TheUserCostofCapital●

usercostofcapitalAnnualcostofowningandusingacapitalasset,equaltoeconomicdepreciationplusforgoneinterest.Wecanalsoexpresstheusercostofcapitalasarateperdollarofcapital:Theusercostofcapitalisgivenbythesumoftheeconomicdepreciationandtheinterest(i.e.,thefinancialreturn)thatcouldhavebeenearnedhadthemoneybeeninvestedelsewhere.Formally,

TheCost-MinimizingInputChoiceWenowturntoafundamentalproblemthatallfirmsface:howto

selectinputstoproduceagivenoutputatminimumcost.Forsimplicity,wewillworkwithtwovariableinputs:labor(measuredinhoursofworkperyear)andcapital(measuredinhoursofuseofmachineryperyear).THEPRICEOFCAPITALThepriceofcapitalisitsusercost,givenbyr

=Depreciationrate+Interestrate.THERENTALRATEOFCAPITAL●

rentalrate Costperyearofrentingoneunitofcapital.Ifthecapitalmarketiscompetitive,therentalrateshouldbeequaltotheusercost,r.Why?Firmsthatowncapitalexpecttoearnacompetitivereturnwhentheyrentit.Thiscompetitivereturnistheusercostofcapital.Capitalthatispurchasedcanbetreatedasthoughitwererentedatarentalrateequaltotheusercostofcapital.TheIsocostLine(7.2)●

isocostline Graphshowingallpossiblecombinationsoflaborand

capitalthatcanbepurchasedforagiventotalcost.Toseewhatanisocostlinelookslike,recallthatthetotalcostCofproducinganyparticularoutputisgivenbythesumofthefirm’slaborcostwLanditscapitalcostrK:Ifwerewritethetotalcostequationasanequationforastraightline,wegetItfollowsthattheisocostlinehasaslopeofΔK/ΔL=−(w/r),whichistheratioofthewageratetotherentalcostofcapital.

PRODUCINGAGIVENOUTPUTATMINIMUMCOSTFIGURE7.3Isocostcurvesdescribethecombinationofinputstoproductionthatcostthesameamounttothefirm.IsocostcurveC1istangenttoisoquantq1atAandshowsthatoutputq1canbeproducedatminimumcostwithlaborinputL1andcapitalinputK1.Otherinputcombinations—L2,K2andL3,K3-yieldthesameoutputbutathighercost.ChoosingInputsINPUTSUBSTITUTIONWHENANINPUTPRICECHANGESFIGURE7.4FacinganisocostcurveC1,thefirmproducesoutputq1atpointAusingL1unitsoflaborandK1unitsofcapital.Whenthepriceoflaborincreases,theisocostcurvesbecomesteeper.Outputq1isnowproducedatpointBonisocostcurveC2byusingL2unitsoflaborandK2unitsofcapital.(7.3)Recallthatinouranalysisofproductiontechnology,weshowedthatthemarginalrateoftechnicalsubstitutionoflaborforcapital(MRTS)isthenegativeoftheslopeoftheisoquantandisequaltotheratioofthemarginalproductsoflaborandcapital:Itfollowsthatwhenafirmminimizesthecostofproducingaparticularoutput,thefollowingconditionholds:Wecanrewritethisconditionslightlyasfollows:(7.4)

THECOST-MINIMIZINGRESPONSETOANEFFLUENTFEEFIGURE7.5EXAMPLE7.4THEEFFECTOFEFFLUENTFEESONINPUTCHOICESWhenthefirmisnotchargedfordumpingitswastewaterinariver,itchoosestoproduceagivenoutputusing10,000gallonsofwastewaterand2000machine-hoursofcapitalatA.However,aneffluentfeeraisesthecostofwastewater,shiftstheisocostcurvefromFCtoDE,andcausesthefirmtoproduceatB—aprocessthatresultsinmuchlesseffluent.Aneffluentfeeisaper-unitfeethatthesteelfirmmustpayfortheeffluentthatgoesintotheriver.CostMinimizationwithVaryingOutputLevels

●

expansionpath

Curvepassingthroughpointsoftangency

betweenafirm’sisocostlinesanditsisoquants.Tomovefromtheexpansionpathtothecostcurve,wefollowthreesteps:1. Chooseanoutputlevelrepresentedbyanisoquant.Thenfindthepointoftangencyofthatisoquantwithanisocostline.2. Fromthechosenisocostline,determinetheminimumcostofproducingtheoutputlevelthathasbeenselected.3. Graphtheoutput-costcombination.TheExpansionPathandLong-RunCostsAFIRM’SEXPANSIONPATHANDLONG-RUNTOTALCOSTCURVEFIGURE7.6In(a),theexpansionpath(fromtheoriginthroughpointsA,B,andC)illustratesthelowest-costcombinationsoflaborandcapitalthatcanbeusedtoproduceeachlevelofoutputinthelongrun—i.e.,whenbothinputstoproductioncanbevaried.In(b),thecorrespondinglong-runtotalcostcurve(fromtheoriginthroughpointsD,E,andF)measurestheleastcostofproducingeachlevelofoutput.ENERGYEFFICIENCYTHROUGHCAPITALSUBSTITUTIONFORLABORFIGURE7.7aEXAMPLE7.5REDUCINGTHEUSEOFENERGYGreaterenergyefficiencycanbeachievedifcapitalissubstitutedforenergy.Thisisshownasamovementalongisoquantq1frompointAtopointB,withcapitalincreasingfromK1toK2andenergydecreasingfromE2toE1

inresponsetoashiftintheisocostcurvefromC0

toC1.ENERGYEFFICIENCYTHROUGHTECHNOLOGICALCHANGEFIGURE7.7bEXAMPLE7.5REDUCINGTHEUSEOFENERGYTechnologicalchangeimpliesthatthesameoutputcanbeproducedwithsmalleramountsofinputs.Heretheisoquantlabeledq1

showscombinationsofenergyandcapitalthatwillyieldoutputq1;thetangencywiththeisocostlineatpointCoccurswithenergyandcapitalcombinationsE2andK2.Becauseoftechnologicalchangetheisoquantshiftsinward,sothesameoutputq1cannowbeproducedwithlessenergyandcapital,inthiscaseatpointD,withenergyandcapitalcombinationE1andK1.Long-RunversusShort-Run

CostCurves7.4TheInflexibilityofShort-RunProductionTHEINFLEXIBILITYOFSHORT-RUNPRODUCTIONFIGURE7.8Whenafirmoperatesintheshortrun,itscostofproductionmaynotbeminimizedbecauseofinflexibilityintheuseofcapitalinputs.Outputisinitiallyatlevelq1,(usingL1,K1).Intheshortrun,outputq2canbeproducedonlybyincreasinglaborfromL1toL3becausecapitalisfixedatK1.Inthelongrun,thesameoutputcanbeproducedmorecheaplybyincreasinglaborfromL1toL2andcapitalfromK1toK2.Long-RunAverageCost●long-runaveragecostcurve(LAC)Curverelatingaveragecostofproductiontooutputwhenallinputs,includingcapital,arevariable.●short-runaveragecostcurve(SAC)Curverelatingaveragecostofproductiontooutputwhenlevelofcapitalisfixed.●long-runmarginalcostcurve(LMC)

Curveshowingthechangeinlong-runtotalcostasoutputisincreasedincrementallyby1unit.Inthelongrun,theabilitytochangetheamountofcapitalallowsthe

firmtoreducecosts.Themostimportantdeterminantoftheshapeofthelong-runaverageandmarginalcostcurvesistherelationshipbetweenthescaleofthefirm’soperationandtheinputsthatarerequiredtominimizeitscosts.LONG-RUNAVERAGEANDMARGINALCOSTFIGURE7.9Whenafirmisproducingatanoutputatwhichthelong-runaveragecostLACisfalling,thelong-runmarginalcostLMCislessthanLAC.Conversely,whenLACisincreasing,LMCisgreaterthanLAC.ThetwocurvesintersectatA,wheretheLACcurveachievesitsminimum.EconomiesandDiseconomiesofScaleAsoutputincreases,thefirm’saveragecostofproducingthatoutputis

likelytodecline,atleasttoapoint.Thiscanhappenforthefollowingreasons:1. Ifthefirmoperatesonalargerscale,workerscanspecializeintheactivitiesatwhichtheyaremostproductive.2. Scalecanprovideflexibility.Byvaryingthecombinationofinputsutilizedtoproducethefirm’soutput,managerscanorganizetheproductionprocessmoreeffectively.3. Thefirmmaybeabletoacquiresomeproductioninputsatlowercostbecauseitisbuyingtheminlargequantitiesandcanthereforenegotiatebetterprices.Themixofinputsmightchangewiththescaleofthefirm’soperationifmanagerstakeadvantageoflower-costinputs.Atsomepoint,however,itislikelythattheaveragecostofproduction

willbegintoincreasewithoutput.Therearethreereasonsforthisshift:1. Atleastintheshortrun,factoryspaceandmachinerymaymakeitmoredifficultforworkerstodotheirjobseffectively.2. Managingalargerfirmmaybecomemorecomplexandinefficientasthenumberoftasksincreases.3. Theadvantagesofbuyinginbulkmayhavedisappearedoncecertainquantitiesarereached.Atsomepoint,availablesuppliesofkeyinputsmaybelimited,pushingtheircostsup.●economiesofscaleSituationinwhichoutputcanbedoubledfor

lessthanadoublingofcost.●diseconomiesofscaleSituationinwhichadoublingofoutputrequiresmorethanadoublingofcost.IncreasingReturnstoScale:Outputmorethandoubleswhenthequantitiesofallinputsaredoubled.EconomiesofScale:

Adoublingofoutputrequireslessthanadoublingofcost.Economiesofscaleareoftenmeasuredintermsofacost-outputelasticity,EC.ECisthepercentagechangeinthecostofproductionresultingfroma1-percentincreaseinoutput:(7.5)ToseehowECrelatestoourtraditionalmeasuresofcost,rewriteequationasfollows:(7.6)

TheRelationshipbetweenShort-RunandLong-RunCostLONG-RUNCOSTWITHECONOMIESANDDISECONOMIESOFSCALEFIGURE7.10Thelong-runaveragecostcurveLACistheenvelopeoftheshort-runaveragecostcurvesSAC1,SAC2,andSAC3.Witheconomiesanddiseconomiesofscale,theminimumpointsoftheshort-runaveragecostcurvesdonotlieonthelong-runaveragecostcurve.ProductionwithTwoOutputs—

EconomiesofScope7.5ProductTransformationCurves●

producttransformationcurveCurveshowingthevariouscombinationsoftwodifferentoutputs(products)thatcanbeproducedwithagivensetofinputs.PRODUCTTRANSFORMATIONCURVEFIGURE7.11Theproducttransformationcurvedescribesthedifferentcombinationsoftwooutputsthatcanbeproducedwithafixedamountofproductioninputs.TheproducttransformationcurvesO1andO2arebowedout(orconcave)becausethereareeconomiesofscopeinproduction.EconomiesandDiseconomiesofScope●economiesofscopeSituationinwhichjointoutputofasinglefirm

isgreaterthanoutputthatcouldbeachievedbytwodifferentfirmswheneachproducesasingleproduct.●diseconomiesofscopeSituationinwhichjointoutputofasinglefirmislessthancouldbeachievedbyseparatefirmswheneachproducesasingleproduct.TheDegreeofEconomiesofScope●degreeofeconomiesofscope(SC)PercentageofcostsavingsresultingwhentwoormoreproductsareproducedjointlyratherthanIndividually.Tomeasurethedegreetowhichthereareeconomiesofscope,weshouldaskwhatpercentageofthecostofproductionissavedwhentwo(ormore)productsareproducedjointlyratherthanindividually.(7.7)

Inthetruckingbusiness,severalrelatedproducts

canbeoffered,dependingonthesizeoftheload

andthelengthofthehaul.Thisrangeofpossibilities

raisesquestionsaboutbotheconomiesofscaleand

economiesofscope.Thescalequestionaskswhetherlarge-scale,direct

haulsaremoreprofitablethanindividualhaulsby

smalltruckers.Thescopequestionaskswhethera

largetruckingfirmenjoyscostadvantagesinoperatingdirectquickhaulsandindirect,slowerhauls.Becauselargefirmscarrysufficientlylargetruckloads,thereisusuallynoadvantagetostoppingatanintermediateterminaltofillapartialload.Becauseotherdisadvantagesareassociatedwiththemanagementofverylargefirms,theeconomiesofscopegetsmallerasthefirmgetsbigger.Thestudysuggests,therefore,thattocompeteinthetruckingindustry,afirmmustbelargeenoughtobeabletocombineloadsatintermediatestoppingpoints.EXAMPLE7.6ECONOMIESOFSCOPEINTHETRUCKINGINDUSTRYDynamicChangesinCosts—

TheLearningCurve7.6Asmanagementandlaborgainexperiencewithproduction,thefirm’smarginalandaveragecostsofproducingagivenlevelofoutputfallforfourreasons:1. Workersoftentakelongertoaccomplishagiventaskthefirstfewtimestheydoit.Astheybecomemoreadept,theirspeedincreases.2. Managerslearntoscheduletheproductionprocessmoreeffectively,fromtheflowofmaterialstotheorganizationofthemanufacturingitself.3. Engineerswhoareinitiallycautiousintheirproductdesignsmaygainenoughexperiencetobeabletoallowfortolerancesindesignthatsavecostswithoutincreasingdefects.Betterandmorespecializedtoolsandplantorganizationmayalsolowercost.4. Suppliersmaylearnhowtoprocessrequiredmaterialsmoreeffectivelyandpassonsomeofthisadvantageintheformoflowercosts.●

learningcurveGraphrelatingamountofinputsneededbyafirmtoproduceeachunitofoutputtoitscumulativeoutput.GraphingtheLearningCurveTHELEARNINGCURVEFIGURE7.12Thelearningcurveisbasedontherelationship(7.8)Afirm’sproductioncostmayfallovertimeasmanagersandworkersbecomemoreexperiencedandmoreeffectiveatusingtheavailableplantandequipment.Thelearningcurveshowstheextenttowhichhoursoflaborneededperunitofoutputfallasthecumulativeoutputincreases.ECONOMIESOFSCALEVERSUSLEARNINGFIGURE7.13Afirm’saveragecostofproductioncandeclineovertimebecauseofgrowthofsaleswhenincreasingreturnsarepresent(amovefromAtoBoncurveAC1),oritcandeclinebecausethereisalearningcurve(amovefromAoncurveAC1toConcurveAC2).LearningversusEconomiesofScaleTABLE7.3PREDICTINGTHELABORREQUIREMENTSOFPRODUCINGAGIVENOUTPUTCUMULATIVEOUTPUT(N)PER-UNITLABORREQUIREMENTFOREACH10UNITSOFOUTPUT(L)*TOTALLABORREQUIREMENT101.0010.020.8018.0=(10.0+8.0)30.7025.0=(18.0+7.0)40.6431.4=(25.0+6.4)50.60