Costs and production

fixed costs – costs that do not vary with the level of output. Fixed costs are the same at all levels of output (even when output equals zero).

variable costs – costs that vary with the level of output (= 0 when output is zero)

Total costs

VCFCTC

Example

Example (cont.)

Fixed costs

Variable costs

TC, TVC, and TFC

Average fixed cost (AFC) = TFC / Q

Average fixed cost

Average variable cost (AVC) = TVC / Q

Average variable cost

Average total cost (ATC) = TC / Q ATC = AFC + AVC (since TFC + TVC = TC)

Average total cost

Marginal cost (MC) = cost of an additional unit of output

Marginal cost

Average fixed cost

Note that the MC curve intersects the AVC and ATC at their respective minimum points

AVC, ATC, and MC

film

Cost curves

Economies of scale – factors that lower average cost as the size of the firm rises in the long run◦ Sources: specialization and division of labor,

indivisibilities of capital, etc. Diseconomies of scale – factors that raise

average cost as the size of the firm rises in the long run◦ Sources: increased cost of managing and

coordination as firm size rises Constant returns to scale – average costs do

not change as firm size changes(film)

Economies and diseconomies of scale

Long-run average total cost (LRATC)

Minimum efficient scale = lowest level of output at which LRATC is minimized

Minimum efficient scale

The total amount of output produced by a firm is a function of the levels of input usage by the firm

Total Physical Product (TPP) function - a short-run relationship between the amount of labour and the level of output, ceteris paribus.

Production

Total physical product (TPP)

as the level of a variable input rises in a production process in which other inputs are fixed, output ultimately increases by progressively smaller increments.

Law of diminishing returns

APP = TPP / amount of input

Average physical product (APP)

Quantityof labor TPP APP

0

5

10

15

20

25

30

35

40

45

0

50

120

180

220

250

270

275

275

270

-10

12

12

11

10

9

7.86

6.88

6

the additional output that results from the use of an additional unit of a variable input, holding other inputs constant

measured as the ratio of the change in output (TPP) to the change in the quantity of labor (or other input) used

Marginal physical product (MPP)

Note that the MPP is positive when an increase in labor results in an increase in output; a negative MPP occurs when output falls when additional labor is used.

Computation of MPP and APP

Quantityof labor TPP APP

0

5

10

15

20

25

30

35

40

45

MPP0

50

120

180

220

250

270

275

275

270

-10

12

12

11

10

9

7.86

6.88

6

10

14

12

8

6

4

1

0

-1

TPP

APP rises when MPP > APP

APP falls when MPP < APP

APP is maximized when MPP = APP

Relationship of APP and MPP

http://www.oswego.edu/~kane/eco101.htm Czarny B. „Podstawy ekonomii”, PWE, 2002

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