FUNGSI PRODUKSI PERTANIAN

&
BIAYA PRODUKSI PERTANIAN

Disarikan:
Prof Dr Ir Soemarno MS
Malang, fpub-2008
 PRODUKSI
dan
BIAYA PRODUKSI
 RUANG LINGKUP
1. Usaha bisnis and the time horizon related problems
2. Total and marginal product
3. Law of diminishing returns
4. Different types of costs: explicit versus implicit costs, and
fixed versus variable costs and sunk costs
5. Total cost in terms of total fixed cost and total variable cost
6. Marginal cost
7. The least-cost rule
8. Long-run average total cost curve in terms of economies of
scale, constant returns to scale, and diseconomies of scale.
9. Minimum efficient scale (MES) and how many firms will serve
a market.
 SIFAT USAHA BISNIS
 Apakah Unit Usaha Bisnis itu?
– An organization, owned and
operated by private individuals,
that specializes in production

Production is the process of

combining inputs to make
outputs
 SIFAT USAHA BISNIS

 The firm must deal with a variety of individuals and

organizations
– Sells its output to customers
– Receives revenue from them in return
 Every firm must deal with the government
– Pays taxes to the government
– Must obey government laws and regulations
– Receive valuable services from the government
 Legal systems
 Financial systems
 Profit = Keuntungan
 Where does the revenue go?
– Much of it goes to input suppliers
The total of all of these payments
makes up the firm’s costs of production

Profit = Revenue – Costs

Unit Usaha (Firm) dan
Lingkungannya

Owners

Initial Financing Profit After Taxes

Input Costs Taxes

Input The Firm
Government
Suppliers (Management)
Inputs Government Services
Government Regulations
Output Revenue

Customers
 Produksi
 Inputs include resources
– Labor
– Capital
– Land
– Raw materials
– Other goods and services provided by other firms
 Way in which these inputs may be combined
to produce output is the firm’s technology
– Treated as a given
– For each different combination of inputs,
the production function tells us the
maximum quantity of output a firm can
produce over some period of time
 FUNGSI PRODUKSI

Alternative Different
Input
Productio Quantities
Combination n of Output
s Function
Time Horizon:
-- The Short Run and the
Long Run
 Useful to categorize firms’ decisions into
– Long-run decisions—involves a time horizon
long enough for a firm to vary all of its inputs
 Toguide the firm over the next several years
(long run lens)
– Short-run decisions—involves any time horizon
over which at least one of the firm’s inputs
cannot be varied
 Todetermine what the firm should do next week
( short run lens)
 Produksi dalam Jangka
Pendek
 There is nothing they can do about their fixed
inputs
– Stuck with whatever quantity they have
– However, can make choices about their variable
inputs
 Fixed inputs
– An input whose quantity must remain constant,
regardless of how much output is produced
 For example:
 Variable input
– An input whose usage can change as the level of
output changes
 For example:
 Produksi dalam Jangka
Pendek
 Total product
– Maximum quantity of output that can be
produced from a given combination of inputs
 Marginal product of labor (MPL) is the change in
total product (ΔQ) divided by the change in the
number of workers hired (ΔL)

ΔQ
MPL =
ΔL
– Tells us the rise in output produced when
one more worker is hired
 Total Product and Marginal
Product
Units of Output

196 Total Product

184
161
∆ Q from hiring fourth worker
130
∆ Q from hiring third worker
90

∆ Q from hiring second worker

30
∆ Q from hiring first worker

1 2 3 4 5 6 Number of Workers
increasing diminishing
marginal marginal
returns returns
Marginal Returns To Labor

 As more and more workers are hired

– MPL first increases
– Then decreases
 Pattern is believed to be typical at
many types of firms
Increasing Marginal Returns to
Labor

 When the marginal product of labor

increases as employment rises, we
say there are increasing marginal
returns to labor
– Each time a worker is hired, total
output rises by more than it did
when the previous worker was hired
Diminishing Returns To Labor

 When the marginal product of labor is decreasing

– There are diminishing marginal returns to labor
– Output rises when another worker is added so
marginal product is positive
– But the rise in output is smaller and smaller with
each successive worker
 Law of diminishing (marginal) returns states that
as we continue to add more of any one input
(holding the other inputs constant)
– Its marginal product will eventually decline
 BIAYA-BIAYA
 A firm’s total cost of producing a given level of output
is the opportunity cost of the owners
– Explicit (involving actual payments)
 Money actually paid out for the use of inputs
– Implicit (no money changes hands)
 The cost of inputs for which there is no direct
money payment
 This is the core of economists’ thinking about costs

 Biaya dapat diukur dengan satuan Rupiah atau dolar

Economic Profit vs Accounting
Profit
 Accounting profit
– The business’s revenue minus the
explicit cost and depreciation
Depreciation occurs because
machines war out over time
 Economic profit
– The business’s revenue minus
opportunity cost
 In economics, profit is simplification of
economic profit.
 The Irrelevance of Sunk
Costs
 Sunk cost is one that already has been paid,
or must be paid, regardless of any future
action being considered
 Should not be considered when making
decisions
 Even a future payment can be sunk
– If an unavoidable commitment to pay it
has already been made
Biaya dalam Jangka Pendek
 Fixed costs = Biaya Tetap
– Costs of a firm’s fixed inputs
 Variable costs = Biaya Tidak-tetap
– Costs of obtaining the firm’s
variable inputs
Measuring Short Run Costs:
Total Costs

 Types of total costs

– Total fixed costs
Cost of all inputs that are fixed in the
short run
– Total variable costs
Costof all variable inputs used in
producing a particular level of output
– Total cost
Costof all inputs—fixed and variable
TC = TFC + TVC
The Firm’s Total Cost Curves In The
Short Run
Dollars

$435
375 TC
315 TVC
TFC
255
195

135

TFC

0 30 90 130 161 184 196

Units of Output
 Average Costs = Biaya
Rata-rata

 Average fixed cost (AFC)

– Total fixed cost per unit of output produced
TFC
AFC =
Q
• Average variable cost (TVC)
– Total variable cost per unit of output produced
TVC
AVC =
Q
• Average total cost (TC)
– Total cost per unit of output produced
TC
ATC =
Q
 Marginal Cost = Biaya
Marjinal
 Marginal Cost
– Increase in total cost from producing one more
unit or output
 Marginal cost is the change in total cost (ΔTC)
divided by the change in output (ΔQ)
ΔTC
MC =
ΔQ
– Tells us how much cost rises per unit increase in
output
– Marginal cost for any change in output is equal to
shape of total cost curve along that interval of
output
 Average And Marginal Costs In The
Short Run

Dollars
$4 MC

AFC ATC
2
AVC

0 30 90 130 161 196

Units of Output
 Bentuk kurva Biaya Marjinal
 When the marginal product of labor
(MPL) rises (falls), marginal cost (MC)
falls (rises)

 Since MPL ordinarily rises and then

falls, MC will do the opposite—it will
fall and then rise
– Thus, the MC curve is U-shaped
 The Relationship Between
Average And Marginal Costs
 At low levels of output, the MC curve lies below the
AVC and ATC curves
– These curves will slope downward
 At higher levels of output, the MC curve will rise
above the AVC and ATC curves
– These curves will slope upward
 As output increases; the average curves will first
slope downward and then slope upward
– Will have a U-shape
 MC curve will intersect the minimum points of the
AVC and ATC curves
 Produksi dan Biaya dlm Jangka
Panjang
 Goal: earn the highest possible profit
– To do this, it must follow the least cost rule
 To produce any given level of output the firm will
choose the input mix with the lowest cost
 Firm must decide what combination of inputs to
use in producing any level of output
 Long-run total cost (LRTC)
– The cost of producing each quantity of output when
the least-cost input mix is chosen in the long run
 Long-run average total cost (LRATC)
– The cost per unit of output in the long run, when all
inputs are variable

LRTC
LRATC =
Q
 The Relationship Between Long-
Run And Short-Run Costs
 For some output levels, LRTC is smaller
than TC
 Long-run total cost of producing a given
level of output can be less than or equal to,
but never greater than, short-run total cost
(LRTC ≤ TC)
 Long-run average cost of producing a given
level of output can be less than or equal to,
but never greater than, short–run average
total cost (LRATC ≤ ATC)
 UKURAN UNIT USAHA
 Plant - collection of fixed inputs at a
firm’s disposal
 Can distinguish between the long run
and the short run
– In the long run, the firm can change
the size of its plant
– In the short run, it is stuck with its
current plant size
 Biaya Rata-rata dan Ukuran
Init-Usaha
 ATC curve tells us how average cost behaves in
the short run, given plant size fixed
– moving along the current ATC curve
 To produce any level of output in the long run, the
firm will always choose that ATC curve with lowest
ATC —among all of the ATC curves available
– move from one ATC curve to another by varying the
size of its plant
– Will also be moving along its LRATC curve
– This insight tells us how we can graph the firm’s
LRATC curve
 Long-Run Average Total Cost
For each output level, firm will always
choose to operate on the ATC curve with
the lowest possible cost

Dollars
ATC1 LRATC
$4.00 ATC3
ATC0 ATC2
3.00 C
D
2.00 B
A E
1.00

0 30 90 130 161 184 250 300

175196
Use 0 Use 1 Use 2 Use 3
automated automated automated automated
lines lines lines lines
Units of Output
 SEKALA EKONOMI
 According to whether the LRATC decreases /
does not change / increase as output increases,
there are three types of issues:
– Economies of scale (decreasing LRATC) at
relatively low levels of output
– Constant returns to scale (constant LRATC)
at some intermediate levels of output
– Diseconomies of scale (increasing LRATC) at
relatively high levels of output
 LRATC curves are typically U-shaped
 The Shape of LRATC
Dollars
$4.00

3.00
LRATC
2.00

1.00

0 130 184

Economies of Scale Constant Diseconomies of Scale

Returns to
Scale Units of Output
 Economies of Scale
 An increase in output causes LRATC to
decrease
– The more output produced, the lower the
cost per unit
– LRATC curve slopes downward
– Long-run total cost rises proportionately less
than output
– Increasing return to scale
 Example
Why Should A Firm Experience
The Economies of Scale?
 Gains from specialization
– greatest opportunities for increased specialization
at a relatively low level of output
 More efficient use of lumpy inputs
– Some types of inputs cannot be increased in tiny
increments, but rather must be increased in large
jumps, therefore must be purchased in large lumps
 Low cost per unit is achieved only at high levels of
output
 More efficient use of lumpy inputs will have more
impact on LRATC at low levels of outputs
 Diseconomies of Scale

 LRATC increases as output increases

– LRATC curve slopes upward
– LRTC rises more than in proportion to output
– More likely at higher output levels
 As output continues to increase, most firms
will reach a point where bigness begins to
cause problems
– True even in the long run, when the firm is
free to increase its plant size as well as its
workforce
Using the Theory: Long Run
Costs, Market Structure and
Mergers
 The number of firms in a market is an
important aspect of market structure —a
general term for the environment in which
trading takes place
 What accounts for these differences in the
number of sellers in the market?
– Shape of the LRATC curve plays an
important role in the answer
 LRATC and the Size of
Firms
 Minimum efficient scale (MES) for the firm
– Lowest level of output at which it can achieve
minimum cost per unit
The output level at which the LRATC first hits
bottom
 By comparing the MES (from LRATC curve) for the
typical firm and and the maximum potential
market (from the market demand curve)
– we may say something about the market
structure
 Two Extreme Cases - 1
 MES far smaller than market
quantities demanded
– firms that are relatively small will have a
cost advantage over relatively large firms
– economies of scale are exhausted rapidly
 Market should be populated by many small
firms, each producing for only a tiny share
of the market
 Examples: market for personal services
 Figure 9(a)
 Many Small Firms

Dollars LRATCTypical Firm

$160 F

E
80

DMarket

0 1,000 3,000 100,000

Units per Month
Two Extreme Cases - 2
 There are significant economies of scale that
continue as output increases
– Even to the point where a typical firm is
supplying the maximum possible quantity
demanded
– This market will gravitate naturally toward
monopoly
 A single seller in the market
 Examples: regular mail delivery, city subway
system, etc
 Figure 9(b)
 Monopoly

LRATCTypical Firm
Dollars

$160

80

DMarket

0 100,000
Units per Month
 Other Cases
 In some cases the MES occurs at 25% of
the maximum potential market
– In this type of market, expect to see a
few large competitors
– Significant lumpy inputs creating
economies of scale
– Until each firm has expanded to
produce for a large share of the
market
– Figure 9(c)
 A Few Large Firms in the market
Dollars

$200
LRATCTypical Firm
H F

80
E
DMarket

0 25,000 100,000
Units per Month
 Other Cases

 When both small and large firms can

have equally low average costs with
neither having any advantage over the
other
– Firms of varying sizes can coexist
– Figure 9(d)
diseconomies of scale don’t set in
until output exceeds 10,000 units
 Coexistence of Large and Small
Firms

Dollars LRATCTypical Firm

$160

E F
80

DMarket

0 1,000 10,000 100,000

Units per Month
 The Urge To Merge
 If by doubling their output, firms could slide down the
LRATC curve in Figure 9, and enjoy a significant cost
advantage over any other, still-smaller firm, they
would
– This is a market that is ripe for a merger wave
 A sudden merger wave is usually set off by some
change in the market
 Market structure in general—and mergers and
acquisitions in particular—raise many important issues
for public policy
– Low-cost production can benefit consumers—if it
results in lower prices
 Theory of Production and
Costs
 Focus- mainly on the the firm.
 We will examine
– Its production capacity given available
resources
– the related costs involved
What is a firm?
 A firm is an entity concerned with the
purchase and employment of resources in the
production of various goods and services.
 Assumptions:
– the firm aims to maximize its profit with the
use of resources that are substitutable to a
certain degree
– the firm is" a price taker in terms of the
resources it uses.
 FUNGSI PRODUKSI
 The production function refers to the physical
relationship between the inputs or resources of a
firm and their output of goods and services at a
given period of time, ceteris paribus.

 The production function is dependent on

different time frames. Firms can produce for a
brief or lengthy period of time.
Firm’s Inputs
 Inputs - are resources that contribute
in the production of a commodity.

 Most resources are lumped into three

categories:
– Land,
– Labor
– Capital.
Fixed vs. Variable Inputs
 Fixed inputs -resources used at a constant
amount in the production of a commodity.
 Variable inputs - resources that can change in
quantity depending on the level of output
being produced.
 The longer planning the period, the distinction
between fixed and variable inputs disappears,
i.e., all inputs are variable in the long run.
 Production Analysis with One
Variable Input

 Total product (Q) refers to the total amount

of output produced in physical units (may
refer to, kilograms of sugar, sacks of rice
produced, etc)
 The marginal product (MP) refers to the rate
of change in output as an input is changed
by one unit, holding all other inputs constant.
∆TP L
MPL =
∆L
Total vs. Marginal Product
 Total Product (TPx) = total amount of
output produced at different levels of
inputs
 Marginal Product (MPx) = rate of change in
output as input X is increased by one unit,
ceteris paribus.
∆TPX
MPX =
∆X
Production Function of a Rice
Farmer
Units of L Total Product Marginal Product
(QL or TPL) (MPL)
0 0 -
1 2 2
2 6 4
3 12 6
4 20 8
5 26 6
6 30 4
7 32 2
8 32 0
9 30 -2
10 26 -4
Q

QL

0 L
 QL

32
30
26 QL
Total product

20

12

2
L
0 1 2 3 4 5 6 7 8 9 10

Labor

FIGURE 5.1. Total product curve. The total product curve shows the behavior of total product vis-a-vis an input (e.g., labor)
used in production assuming a certain technological level.
Marginal Product
 The marginal product refers to the rate of
change in output as an input is changed by
one unit, holding all other inputs constant.
 Formula:

∆TPL
MP L =
∆L
Marginal Product
 Observe that the marginal product initially
increases, reaches a maximum level, and
beyond this point, the marginal product
declines, reaches zero, and subsequently
becomes negative.
 The law of diminishing returns states that
"as the use of an input increases (with other
inputs fixed), a point will eventually be
reached at which the resulting additions to
output decrease"
Law of Diminishing Marginal Returns

 As more and more of an input is added

(given a fixed amount of other inputs),
total output may increase; however, as
the additions to total output will tend to
diminish.
 Counter-intuitive proof: if the law of
diminishing returns does not hold, the
world’s supply of food can be produced
in a hectare of land.
 Average Product (AP)
 Average product is a concept commonly
associated with efficiency.
 The average product measures the total
output per unit of input used.
– The "productivity" of an input is usually
expressed in terms of its average product.
– The greater the value of average product,
the higher the efficiency in physical terms.
 Formula: TP L
AP L =
L
TABLE 5.2. Average product of labor.
Labor (L) Total product of labor Average product of
(TPL) labor (APL)

0 0 0
1 2 2
2 6 3
3 12 4
4 20 5
5 26 5.2
6 30 5
7 32 4.5
8 32 4
9 30 3.3
10 26 2.6
 The slope of the line from the
origin is a measure of the
AVERAGE
Y rise Y
Slope = =
run L

a b Y

Rise = Y

L1 L2 L
0 Run = L
Total
Product The average product at b is
Q highest.
AP at c is less than at a.
AP at d is less than
b
at c. c
d
QL

0 L
Q Highest Slope of Line
from Origin
Max APL

Inflection point
Max MPL TPL

0 L1 L2 L3 L
Relationship between Average
and Marginal Curves: Rule of
Thumb
 When the marginal is less than the
average, the average decreases.
 When the marginal is equal to the
average, the average does not
change (it is either at maximum or
minimum)
 When the marginal is greater than the
average, the average increases
Relationship between Average and
Marginal Curves: Example of Econ 11
Scores

 When the marginal score (new exam) is

less than your average score, the
average decreases.
 When the marginal score (new exam) is
equal to the average score, the average
does not change.
 When the marginal score (new exam) is
greater than your average score, the
average increases.
AP,MP

At Max AP,
MP=AP

Max MPL
Max APL

APL

0 L1 L2 L3 L
MPL
 TP

TPL

0 L1 L2 L3 L
Stage I Stage II Stage III
MP>AP MP<AP
AP,MP AP increasing AP decreasing
MP<0
AP decreasing
MP still positive

APL

0 L1 L2 L3 L
MPL
Three Stages of Production

 In Stage I
– APL is increasing so MP>AP.
– All the product curves are increasing
– Stage I stops where APL reaches its
maximum at point A.
– MP peaks and then declines at point C and
beyond, so the law of diminishing returns
begins to manifest at this stage
Three Stages of Production
 Stage II
– starts where the APL of the input
begins to decline.
– QL still continues to increase,
although at a decreasing rate, and
in fact reaches a maximum
– Marginal product is continuously
declining and reaches zero at point
D, as additional labor inputs are
employed.
Three Stages of Production
 Stage III starts where the MPL has
turned negative.
– all product curves are decreasing.
– total output starts falling even as
the input is increased
 Biaya Produksi
 Opportunity Cost Principle - the economic cost
of an input used in a production process is the
value of output sacrificed elsewhere. The
opportunity cost of an input is the value of
foregone income in best alternative
employment.
 Implicit vs. Explicit Costs
– Explicit costs – costs paid in cash
– Implicit cost – imputed cost of self-owned or
self employed resources based on their
opportunity costs.
7 Cost Concepts (Short-run)

1. Total Fixed Cost (TFC)

2. Total Variable Cost (TVC)
3. Total Cost (TC=TVC+TFC)
4. Average Fixed Cost (AFC=TFC/Q)
5. Average Variable Cost (AVC=TVC/Q)
6. Average Total Cost (AC=AFC+AVC)
7. Marginal Cost (MC= ∆AVC/∆Q
 Analysis Jangka Pendek
 Total fixed cost (TFC) is more commonly referred
to as "sunk cost" or "overhead cost."
– Examples: include the payment or rent for land,
buildings and machinery.
– The fixed cost is independent of the level of output
produced.
– Graphically, depicted as a horizontal line
Short Run Analysis
 Total variable cost (TVC) refers to the cost that
changes as the amount of output produced is changed.
– Examples - purchases of raw materials, payments to
workers, electricity bills, fuel and power costs.
– Total variable cost increases as the amount of output
increases.
If no output is produced, then total variable cost is
zero;
the larger the output, the greater the total variable
cost.
Short Run Analysis
 Total cost (TC) is the sum of total
fixed cost and total variable cost

– TC=TFC+TVC

– As the level of output increases,

total cost of the firm also increases.
Total Costs of Production
Units of Total Total Total Total Marginal Average
Labor Product Fixed Variable Cost Cost Cost
Cost Cost

L TPL TFC TVC TC MC AC

0 0 100 0 100- -
1 6 100 30 130 30 130
2 10 100 50 150 20 75
3 12 100 60 160 10 53.3
4 13 100 65 165 5 41.25
5 15 100 75 175 10 35
6 19 100 95 195 20 32.5
7 25 100 125 225 30 32.14
8 33 100 165 265 40 33.12
9 43 100 215 315 50 35
10 55 100 275 375 60 37.5
Peso
s

TC
(Total Cost)

TVC
(Total Variable Cost)

TFC
(Total Fixed Cost)

0 Q
“TOTAL” COST CURVES
Peso
s

AFC=TFC/Q.
As more output is produced,
the Average Fixed Cost
decreases.

AFC
(Average Fixed Cost)

0 Q
Peso The Average
s
Variable Cost at a
point on the TVC curve
is measured by the
slope of the line from TVC
the origin to that (Total Variable Cost)

point.
AVC=TVC/Q

Minimum AVC

0 q1 Q
Peso
TVC
s
Inflection (Total Variable Cost)

point

0 q1 Q

MC
(Marginal Cost)

q1
Peso
s
The Average Variable Cost is U
shaped. First it decreases,
reaches a minimum and then
increases.
AVC
(Average Variable
Cost)

Minimum AVC

0 q1 Q
Peso The Marginal Cost curve
s passes through the
minimum point of the AVC
curve. MC (Marginal Cost)

It is also U-shaped. First it AVC

decreases, reaches a (Average Variable
Cost)
minimum and then
increases.

Minimum AVC

0 q1 Q
Peso MC
s
AC

AVC

AFC

0 q1 Q

The “PER UNIT” COST CURVES

Average Cost of Production

(Q) (TC) (AC)

0 100 -
1 130 130.00
2 150 75.00
3 160 53.33
4 165 41.25
5 175 35.00
6 195 32.50
7 225 32.14
8 265 33.13
9 315 35.00
10 375 37.50
 Average Variable Costs of Production

Total Product Total Variable Cost (AVC) Average Variable Cost

(Q) (AVC)

0 0 0
1 30 30.0
2 50 25.0
3 60 20.0
4 65 16.3
5 75 15.0
6 95 15.8
7 125 17.9
8 165 20.6
9 215 23.9
10 275 27.5
 LTC LTC
All inputs are variable in the
long run. There are no fixed
Long Run Total Cost

costs.

Q
Total Product

LONG-RUN TOTAL COST CURVE

 The LAC

 The LAC curve is an envelop curve of

all possible plant sizes. Also known as
“planning curve”
 It traces the lowest average cost of
producing each level of output.
 It is U-shaped because of
– Economies of Scale
– Diseconomies of Scale
COST

LAC

SAC1

SAC2

0 Q

LONG-RUN AVERAGE COST CURVE

COST

LAC
SAC1

0 Q
q0
 Building a larger sized plant
(size 2) will result in a lower
COST average cost of producing q0

LAC
SAC1

SAC2

0 Q
q0
 Likewise, a larger sized plant
COST (size 3) will result to a lower
average cost of producing q1

SAC1 LAC
SAC2
SAC3

0 Q
q0 q1
Economies and Diseconomies of
Scale

 Economies of Scale- long run average cost

decreases as output increases.
– Technological factors
– Specialization

 Diseconomies of Scale: - long run average

cost increases as output increases.
– Problems with management – becomes
costly, unwieldy
COST

LAC

SAC1

SAC2

Economies of Diseconomies of
Scale Scale
0 Q1 Q

LONG-RUN AVERAGE COST CURVE

 LONG-RUN AVERAGE and MARGINAL COST CURVES

LMC
COST

SMC2
LAC

SAC2
SMC1 SAC1

0 Q1 Q
 LAC and LMC
 Long-run Average Cost (LAC) curve
– is U-shaped.
– the envelope of all the short-run average
cost curves;
– driven by economies and diseconomies of
size.
 Long-run Marginal Cost (LMC) curve
– Also U-shaped;
– intersects LAC at LAC’s minimum point.