Post on 01-Apr-2015
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
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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