IRS may take place, for example, if the cost of production of a manufactured good would decrease with the increase in quantity produced due to the production materials being obtained at a cheaper price.
The second stage, constant returns to scale CRS refers to a production process where an increase in the number of units produced causes no change in the average cost of each unit. If output changes proportionally with all the inputs, then there are constant returns to scale. The final stage, diminishing returns to scale DRS refers to production for which the average costs of output increase as the level of production increases.
DRS might occur if, for example, a furniture company was forced to import wood from further and further away as its operations increased. The economic cost is based on the cost of the alternative chosen and the benefit that the best alternative would have provided if chosen.
Throughout the production of a good or service, a firm must make decisions based on economic cost. The economic cost of a decision is based on both the cost of the alternative chosen and the benefit that the best alternative would have provided if chosen. Economic cost includes opportunity cost when analyzing economic decisions.
An example of economic cost would be the cost of attending college. The accounting cost includes all charges such as tuition, books, food, housing, and other expenditures. The opportunity cost includes the salary or wage the individual could be earning if he was employed during his college years instead of being in school.
So, the economic cost of college is the accounting cost plus the opportunity cost. Economic cost takes into account costs attributed to the alternative chosen and costs specific to the forgone opportunity. Before making economic decisions, there are a series of components of economic costs that a firm will take into consideration.
These components include:. Privacy Policy. Skip to main content. Search for:. Production Cost. Types of Costs Variable costs change according to the quantity of goods produced; fixed costs are independent of the quantity of goods being produced. Learning Objectives Differentiate fixed costs and variable costs.
Key Takeaways Key Points Total cost is the sum of fixed and variable costs. Variable costs change according to the quantity of a good or service being produced. The amount of materials and labor that is needed for to make a good increases in direct proportion to the number of goods produced. Fixed costs are independent of the quality of goods or services produced. Fixed costs also referred to as overhead costs tend to be time related costs including salaries or monthly rental fees.
Fixed costs are only short term and do change over time. The long run is sufficient time of all short-run inputs that are fixed to become variable. Key Terms fixed cost : Business expenses that are not dependent on the level of goods or services produced by the business.
Average and Marginal Cost Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced. Learning Objectives Distinguish between marginal and average costs. Key Takeaways Key Points The marginal cost is the cost of producing one more unit of a good. When the average cost declines, the marginal cost is less than the average cost.
When the average cost increases, the marginal cost is greater than the average cost. When the average cost stays the same is at a minimum or maximum , the marginal cost equals the average cost.
Key Terms marginal cost : The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output. Additional cost associated with producing one more unit of output.
Short Run and Long Run Costs Long run costs have no fixed factors of production, while short run costs have fixed factors and variables that impact production. Learning Objectives Explain the differences between short and long run costs. Key Takeaways Key Points In the short run, there are both fixed and variable costs. Consumers might pay such a company directly, or perhaps hospitals or healthcare practices might subscribe on behalf of their patients. Setting up the website, collecting the information, writing the content, and buying or leasing the computer space to handle the web traffic are all fixed costs that the company must undertake before the site can work.
However, when the website is up and running, it can provide a high quantity of service with relatively low variable costs, like the cost of monitoring the system and updating the information.
In this case, the total cost curve might start at a high level, because of the high fixed costs, but then might appear close to flat, up to a large quantity of output, reflecting the low variable costs of operation.
If the website is popular, however, a large rise in the number of visitors will overwhelm the website, and increasing output further could require a purchase of additional computer space. For other firms, fixed costs may be relatively low. For example, consider firms that rake leaves in the fall or shovel snow off sidewalks and driveways in the winter.
For fixed costs, such firms may need little more than a car to transport workers to homes of customers and some rakes and shovels. Still other firms may find that diminishing marginal returns set in quite sharply. If a manufacturing plant tried to run 24 hours a day, seven days a week, little time remains for routine equipment maintenance, and marginal costs can increase dramatically as the firm struggles to repair and replace overworked equipment.
Every firm can gain insight into its task of earning profits by dividing its total costs into fixed and variable costs, and then using these calculations as a basis for average total cost, average variable cost, and marginal cost. However, making a final decision about the profit-maximizing quantity to produce and the price to charge will require combining these perspectives on cost with an analysis of sales and revenue, which in turn requires looking at the market structure in which the firm finds itself.
For every input e. The cost of production for a given quantity of output is the sum of the amount of each input required to produce that quantity of output times the associated factor payment.
Fixed costs are sunk costs; that is, because they are in the past and the firm cannot alter them, they should play no role in economic decisions about future production or pricing. Variable costs typically show diminishing marginal returns, so that the marginal cost of producing higher levels of output rises. We calculate marginal cost by taking the change in total cost or the change in variable cost, which will be the same thing and dividing it by the change in output, for each possible change in output.
Marginal costs are typically rising. A firm can compare marginal cost to the additional revenue it gains from selling another unit to find out whether its marginal unit is adding to profit. We calculate average total cost by taking total cost and dividing by total output at each different level of output.
Average costs are typically U-shaped on a graph. We calculate average variable cost by taking variable cost and dividing by the total output at each level of output. Average variable costs are typically U-shaped.
The WipeOut Ski Company manufactures skis for beginners. Fixed costs are? Fill in Figure for total cost, average variable cost, average total cost, and marginal cost.
Based on your answers to the WipeOut Ski Company in Figure , now imagine a situation where the firm produces a quantity of 5 units that it sells for a price of? What shapes would you generally expect a total product curve and a marginal product curve to have? Supposed fixed cost is? What does the average fixed cost curve look like? How does fixed cost affect marginal cost?
Why is this relationship important? Average cost curves except for average fixed cost tend to be U-shaped, decreasing and then increasing. Marginal cost curves have the same shape, though this may be harder to see since most of the marginal cost curve is increasing. Why do you think that average and marginal cost curves have the same general shape? Return to Figure. What is the marginal gain in output from increasing the number of barbers from 4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns?
Compute the average total cost, average variable cost, and marginal cost of producing 60 and 72 haircuts. Draw the graph of the three curves between 60 and 72 haircuts. Skip to content Production, Costs, and Industry Structure. Learning Objectives By the end of this section, you will be able to: Understand the relationship between production and costs Understand that every factor of production has a corresponding factor price Analyze short-run costs in terms of total cost, fixed cost, variable cost, marginal cost, and average cost Calculate average profit Evaluate patterns of costs to determine potential profit.
Fixed and Variable Costs We can decompose costs into fixed and variable costs. As production increases, variable costs are added to fixed costs, and the total cost is the sum of the two.
Average Total Cost, Average Variable Cost, Marginal Cost The breakdown of total costs into fixed and variable costs can provide a basis for other insights as well. Cost Curves at the Clip Joint. We can also present the information on total costs, fixed cost, and variable cost on a per-unit basis.
We calculate average total cost ATC by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. We calculate average variable cost AVC by dividing variable cost by the quantity produced.
The average variable cost curve lies below the average total cost curve and is also typically U-shaped. We calculate marginal cost MC by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping. Where do marginal and average costs meet? Lessons from Alternative Measures of Costs Breaking down total costs into fixed cost, marginal cost, average total cost, and average variable cost is useful because each statistic offers its own insights for the firm.
Why are total cost and average cost not on the same graph? A Variety of Cost Patterns The pattern of costs varies among industries and even among firms in the same industry. Key Concepts and Summary For every input e. How can you tell at a glance whether the company is making or losing money at this price by looking at average cost?
At the given quantity and price, is the marginal unit produced adding to profits? Total revenues in this example will be a quantity of five units multiplied by the price of? Total costs when producing five units are?
Thus, at this level of quantity and output the firm experiences losses or negative profits of? If price is less than average cost, the firm is not making a profit. At an output of five units, the average cost is? Thus, at a glance you can see the firm is making losses. At a second glance, you can see that it must be losing? With five units produced, this observation implies total losses of?
When producing five units, marginal costs are? Price is? The addition of a sixth or seventh or eighth barber just to greet people at the door will have less impact than the second one did. This is the pattern of diminishing marginal returns. In this case, the addition of still more barbers would actually cause output to decrease, as shown in the last row of Table 7.
As a result, the total costs of production will begin to rise more rapidly as output increases. This pattern of diminishing marginal returns is common in production. The plot of land is the fixed factor of production, while the water that can be added to the land is the key variable cost. As the farmer adds water to the land, output increases. But adding more and more water brings smaller and smaller increases in output, until at some point the water floods the field and actually reduces output.
Diminishing marginal returns occur because, at a given level of fixed costs, each additional input contributes less and less to overall production. Skip to main content. Module: Production. Search for:. Reading: Fixed and Variable Costs Fixed and Variable Costs Fixed costs are expenditures that do not change regardless of the level of production, at least not in the short term. Table 7. Licenses and Attributions.
0コメント