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Costs and production

Costs and production. Total costs. 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). Example. Example (cont.).

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Costs and production

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  1. Costs and production

  2. Total costs • 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)

  3. Example

  4. Example (cont.)

  5. Fixed costs

  6. Variable costs

  7. TC, TVC, and TFC

  8. Average fixed cost • Average fixed cost (AFC) = TFC / Q

  9. Average variable cost • Average variable cost (AVC) = TVC / Q

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

  11. Marginal cost • Marginal cost (MC) = cost of an additional unit of output

  12. Average fixed cost

  13. AVC, ATC, and MC • Note that the MC curve intersects the AVC and ATC at their respective minimum points

  14. Long-run costs • In the long run, a firm may choose its level of capital, and will select a size of firm that provides the lowest level of ATC.

  15. Economies and diseconomies of scale • 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

  16. Long-run average total cost (LRATC)

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

  18. Production • 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 labourand the level of output, ceteris paribus.

  19. Total physical product (TPP)

  20. Law of diminishing returns • 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.

  21. Average physical product (APP) • APP = TPP / amount of input

  22. Marginal physical product (MPP) • 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

  23. Computation of MPP and APP • 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.

  24. TPP

  25. Relationship of APP and MPP • APP rises when MPP > APP • APP falls when MPP < APP • APP is maximized when MPP = APP

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

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