In some industries, technological change is so fast that it overwhelms other cost issues.
The digital electronics industry is a good example.
Firms in that industry have plans for technological change.
Moore's law states that the cost of computing will fall by half every 18 months.
The computer was first offered to the mass retail market.
Other industries have been affected by increased computational power.
We no longer talk about changes in a good, but rather the development of entirely new goods and ways of doing things, because of the dramatic technological change.
Consider consumer goods.
Cell phones have replaced telephone landlines, which have been replaced by computers with voice and messaging capabilities.
wire less video streaming has replaced VCRs.
Music isn't played from CDs as it used to be, but is streamed online, either by you or a program such as Spotify.
You don't buy paper books, but you do buy online multimedia products that have written components.
Computational technology has made automobiles more reliable and more expensive.
I could modify my car in the 1960s.
Modern cars do not have such parts.
When a car isn't running right, the owner needs to take it to a garage that will hook it up to a computer that will tell them what's wrong.
Lifting the hood is no longer possible.
Electric engines will soon replace gas engines.
The engine in the car is not the only thing that is changing.
The driving is as well.
The introduction of computer technology has led to a decline in the price of automobiles.
These examples show how technological change can cause prices to fall more and more.
Don't think that technological change is limited to high-tech industries.
Chicken production undergoes technological change.
Chickens have fallen in price over the industries.
Chickens were raised in farmyards.
They ate scraps and fed the chicken.
It took space which cost money, it was difficult to standardize, it used energy which meant more feed per pound of chicken, and sometimes it led to disease, since chickens walked.
The technological change was to put the chickens in wire cages so that the manure falls through to a conveyor belt and is transferred outside.
Chickens are fed food with antibiotics to prevent disease.
Soft music is played to keep them calm.
They are slaughtered in a similar way once they reach the proper weight.
It's not clear how the chick feels about this technological change.
This method of raising chickens will likely be replaced in the next couple of decades by another technological change--genetic engineering that will allow chicken parts to be produced directly from single cells.
The effect of learning by doing and technological change is built into the firm's pricing structure.
Businesses might bid low for a big order to give themselves the chance to lower their costs through learning or technological change if they expect their costs to fall with more experience or if they expect technological advances to lower costs in the future.
Learning by doing is related to technological change.
Chicken production did not come about overnight.
Firms learned how to do production and cost analysis for 20 years.
As scientists and firms learn more about cloning and DNA, genetic reproduction of chicken parts will evolve.
The standard model only takes how much to produce into account.
Each of the questions has its own marginal costs and relates to a different aspect of the production decision.
There are 10 or 20 good economic decisions.
Good economic decisions take relevant margins into account.
The reason that the traditional model is important is that each of these questions can be analyzed using the same reasoning used in the traditional model.
The costs you find in a firm's accounts are not the relevant costs.
Economists include in costs what their theory says should be.
All opportunity costs are included.
Accountants who have to measure firms' costs in practice and provide the actual dollar figures take a much more pragmatic approach.
In order to highlight the distinction, let me review the difference between implicit and explicit costs, and introduce another difference-- how economists and accountants measure depreciation of capital.
First, say that a business makes 1,000 widgets2 and sells them for $4 each for a total revenue of $4,000.
The owner of the business had to buy $1,200 worth ofwidgetoo to make these wid gets.
The firm's profit was $2,800 and the total cost was $1,200, according to an accountant.
The costs that can be measured are explicit.
Jim Economic profit is different as the firm's owner.
An economist would pay himself $1,000.
The accountant's calculation doesn't take into account the time and effort of the firm, which adds up to $2,000.
The total that the owner put into making the widgets would be said to be by an economist.
If the business takes 400 hours of the person's time and the person could have earned $8 an hour working for someone else, then the person is forgoing $3,200 in income.
It's a wonderful little device that's different from a wadget.
The production process of fruit flies is simple, unlike most real-world production processes.
If the implicit cost is included, what looks like a $2,800 profit becomes a $400 economic loss.
A $10,000 machine is meant to last 10 years.
After a year, machines like that are in short supply and their value increases to $12,000.
The machine's depreciation for each of its 10 years of existence would be $1,000 if an accountant looked at the firm's costs that year.
An economist would say that since the value of the machine is rising, it has no depreciation and provides a revenue of $2,000 to the firm.
The standard model assumes that all costs are measurable in a single time period, avoiding the messy real-world issues of measuring depreciation costs.
The standard model can be expanded to include these real-world problems.
As computing and information processing costs fall, the model provides a good framework cost accounting and production decisions are becoming more and more integrated with for cost analysis.
Every industry has its own economic analysis software.
Robert Kaplan of the Harvard Business School believes that cost accounting systems based on fixed and variable costs lead firms to make the wrong decisions.
In many industries, direct labor costs have fallen while overhead costs have gone up.
This change in costs facing firms requires a much more careful division of overhead costs and a recognition that what should and should not be assigned as a cost to a particular product differs with each decision.
I don't discuss them because I think the standard model is enough to learn in an introductory course.
In the same way that learning the rules of mechanics provides you with the basics of mechanical engineering, learning the standard model provides you with only the cost analysis.
Building a machine requires years of experience, as well as a knowledge of the laws of mechanics.
Introductory economics can help you start to think about real-world cost measurement, but it can't make you an expert cost analyst.
The discussion of production, cost, and supply is over.
It will take at least two or three reads and careful attention to your professor's lecture before your mind can absorb the material in the two chapters we spent on them.
If you're going to sleep through a lecture, the ones on these chapters aren't for you.
As long as you remember that it is only a framework, you will be able to get into interesting real world issues.
To truly understand those issues, you have to know the basics.
Unless you really feel comfortable with the analysis, it's probably time to review them from the beginning.
There is an envelope relationship between short and long, but a technically run average cost curve and long run average cost efficient process need not be economically curves.
The average cost curves are efficient.
The average total cost is caused by economies of scale initially and eventually by diseconomies.
Once we start applying cost analysis to the real phenomenon, we must include a variety of other dimensions, and that's why diseconomies of scale of costs are important.
Downsizing of scope, learning by doing and technological marginal productivity affect the costs in the real world.
The long-run average cost change, the many dimensions to output, and curve slope upward because of unmeasured costs.
There is a difference between technical efficiency and 2,000 hours of labor.
One farmer can grow a lot of corn.
Is it possible for both methods to take 200 hours of labor and 20 pounds of seed?
Another farmer can grow a lot of corn.
A student just wrote on an exam.
Is it possible that the two production processes go in opposite directions?
A dressmaker can sew 800 garments.
If fabric and labor are used, diseconomies of scale will never happen.
Ford took advantage of 10.
A total cost curve can be drawn.
The average cost is $30 and the price is d.
Sea lions deplete the stock of trout.
The cost of making the first whale is $16,000, which means that the cost curve is downward-sloping.
How does learning affect total?
What is the likelihood that a firm is learning by doing?
Questions from Alternative Perspectives 1.
Firms have an incentive to externalize their costs.
A major survey was conducted by economists.
Adam Smith argued that at birth most people were similar to work groups and that differences in individual abilities were the result of the high road.
The low road Walmart-like approach to cost saving has implications.
A pair of shoes that retails for $28.79 has an approximate value of $1.25 per meal.
The marginal cost should include more costs, such as the saved space from fewer students using the facilities and the reduced labor expenses on food preparation, according to students.
The marginal cost can be raised to $6.00 by manufacturing labor.
Factory overhead is operating.
Jacob Viner told his draftsman to make sure that all the marginal cost curves went through.
Viner told him to do it.
The cost of setting up a steel mill is enormous.
A major issue of contention at many colleges is the quote "To make operations even margin cost of meals that is rebated when a student does not sign ally profitable, big steelmakers must run full-out."
It's ready for the meal plan.
Answers to Margin Questions 1.
The short-run average cost curve slopes down if the method that produces a given level of output at the ward because of increasing marginal productivity and lowest possible cost also uses as few inputs as large average fixed costs.
Bangladesh uses more labor intensive techniques.
The long-run average total cost curve is lower in Bangladesh than it is in the United States due to the fact that there are economies States.
Production in both countries is economical and efficient.