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Managerial

Economics
Production and Cost
H. Suherman Rosyidi
Production Function

Technical relationship between input(s) and


output.
Could be presented in any form:
1) Mathematical function; Q = f(K, L)
2) Table
3) Graphical presentation
Production Function

Short run
At least one of the
inputs is fixed

Long run
All inputs are
variables
Long- and Short run
Production Function
Labor units (L) (hundreds of person hours)

1 2 3 4 5 6 7 8

1 1 3 7 10 12 13 13.5 13
Capital 3 8 14 19 23 26 28 29
2
units
(K) (000s 3 8 18 29 41 52 62 71 79
of
machine 4 11 23 36 50 65 78 90 101
hours)
5 12 26 42 60 80 98 112 124
Short-run production
function
Units of Units of Marginal Average
Variable Output Product Product
Factor (L) (for K = 3)
(Total Product)

0 0
1 8 8 8
2 18 10 9
3 29 11 9.7
4 41 12 10.2
5 52 11 10.4
6 62 10 10.3
7 71 9 10.1
8 79 8 9.9
Total Product (of labor)

TP

Total product
curve must take
this form due to
the law of
diminishing
returns
Labor units (L)
Total Product & Variable Cost
Assuming: price of labor = $10/unit

TP
TVC TP

Q2

Q1

40 30 20 10 0 1 2 3 4
TVC Labor
Total Variabel Cost curve
(TVC)
TVC

0 Output
Total Cost curve (TC)
TC

TVC

TFC
Cost

TVC TFC

0
Output
Marginal Cost (MC)
TC

TC
G TVC
TC A

C
MC =

TC & TVC
Q
TVC 0 B M
Q
F
MC =
Q MC
N

0 M output
Average Cost (AC)
TC
TC = TFC + TVC

TVC & TC
F
TC TFC TVC TVC
B
Q Q Q H
C
AC = AFC + AVC
A J G

AC = TC
D
Q MC
E AC
AVC

A Output J G
Biaya Produksi
Output TFC ($) MC ($) TVC ($) TC ($)

1 40 40

2 50 90 190

3 100 70 260

4 100