The magnitude of production costs depends on the magnitude of the costs of economic resources. Somewhat conventionally, all resources used in production can be divided into two large groups: resources, the value of which can be changed very quickly (for example, costs of raw materials, materials, energy, hiring labor, etc.) and resources, change the volume of use which is possible only over a sufficiently long period of time (construction of a new production facility).

Based on these circumstances, cost analysis is usually carried out in two time periods: short term(when the amount of some resource remains constant, but production volumes can be changed by using more or less resources such as labor, raw materials, materials, etc.) and in long term(when you can change the amount of any resource used in production).

The distinction between short-run and long-run periods corresponds exactly to the distinction between fixed and variable factors of production. Variable factors of production- factors of production, the quantity of which can be changed within the short-term period (for example, the number of employees). Fixed factors of production- factors whose costs are specified and cannot be changed within the short-term period (for example, production capacity). Thus, in the short run, the entrepreneur uses both fixed and variable factors of production. In the long run, all factors of production are variable.

Analysis of production costs in the short term assumes that the quantity of some resource (for example, production capacity) cannot change, but only the quantity of some other separate resource changes. As a result, the question arises: how will the quantity of production change if one resource (capacity) remains constant and another (labor costs) changes, i.e., what will be the dynamics of production volume with a combination of constant and variable factors of production? The answer to this question is given by law of diminishing marginal returns (productivity): Starting at a certain point in time, successive additions of equal units of a variable resource (such as labor) to a constant resource (such as production capacity) produce diminishing returns in the form of a decrease in additional or marginal product per each subsequent unit of the variable resource.

To illustrate the effect of this law, it is necessary to introduce new indicators into the analysis. Total product(TP or Q x) - the total volume of finished goods produced by the company over a certain period of time. Average product(ATP) (average resource productivity) - the ratio of the total volume of output produced (TP) to the used volume of a given resource (in our case, labor):

where Q R is the volume of variable resource involved in production.

Marginal product of a resource (MP) (marginal productivity)- an additional product obtained by involving each subsequent unit of a given factor in the production process, i.e. this indicator gives us information about how the total volume of output will change when the amount of a variable resource changes by one unit. Marginal product is equal to the change in total output divided by the change in the amount of resource used:

Continuous marginal product can be defined mathematically as the first derivative of the total product function, i.e. MP=TP.”

For your information. From the algebra course it is known that the derivative of any function y = f (x) is the limit of the ratio of the increment of the function ( ? y) to the increment of argument ( ? x) as the latter tends to zero:

If the additional units of a variable resource are small enough compared to its total quantity, then mp can be defined as the derivative of the total product function. The latter, in turn, is a function of one variable and one constant resource. Thus MP = dTP(Q R) / dQR. Becausethe derivative of a function shows the rate of change of the function itself, then MP reflects the rate of change in the total volume of production of goods (Q x ) when the amount of a variable resource changes.

The total product (TP) curve in the figure below will show the relationship between the cost and variable factor of production (labor) and the final volume of output produced. The average labor product (ATP) curve will show how much output a firm produces per unit of variable input used. The higher the average product of a resource, the more output a firm receives per unit of resource. The marginal product (MP) curve will show how much additional output a firm receives by attracting an additional unit of a variable resource.

From the presented graphical information we can conclude that after Q 1 units of variable resource are involved in the process of creating a product, the additional product (mp) begins to decrease, and the growth of the total production volume (tp) slows down. As soon as the total product indicator (tp) reaches its maximum level, the marginal return of each subsequent unit of a variable resource begins to take values ​​less than zero, which causes subsequent negative dynamics of the output indicator.

General patterns determined by the principle of diminishing marginal returns allow us to distinguish three areas in the figure:

region of increasing marginal returns(1) - the law of diminishing marginal returns does not work yet. The mp indicator has a positive trend, and the tp indicator is growing at an accelerating pace;

region of diminishing marginal returns(2) - here the marginal productivity of each subsequent unit of a variable resource is lower than the marginal productivity of each previous one. In the region of diminishing marginal returns, total output still grows, but at an increasingly slower rate, reaching its maximum;

area of ​​negative marginal returns(3) - in this section, the marginal productivity of each subsequent unit of a variable resource not only decreases, but also takes on negative values. In this case, the TP indicator, having passed the maximum point, begins to decrease. Note that total product reaches its maximum when marginal product is zero. In the example considered, we observe such a situation when using Q 2 units of a variable factor of production.

The law of diminishing marginal returns applies to all types of variable factors of production in all industries. With the gradual introduction into production of additional units of a variable resource, provided that all other resources are constant, the marginal return of this resource first grows rapidly and then begins to decline down to negative values.

Having formulated the law of diminishing marginal returns, let us return to the problem of analyzing production costs. Practice
indicates that the amount of costs will one way or another depend on the volume of output. In the short term there are:

fixed costs(TFC) the value of which does not depend on the volume of output (depreciation charges, interest on a bank loan, rent, maintenance of the administrative apparatus, etc.). We are talking about the costs of resources related to constant factors of production. The magnitude of these costs is not related to production volumes. Fixed costs exist even when production activities at the enterprise are suspended and the volume of production is zero. An enterprise can avoid these costs only by completely ceasing its activities;

variable costs(TVC), the value of which varies depending on changes in production volume (costs of raw materials, materials, fuel, energy, wages of working personnel, etc.). We are talking about the costs of resources related to variable factors of production. With the expansion of production, variable costs will increase, since the company will need more raw materials, materials, workers, etc. If the company stops production and the output volume (Q x) reaches zero, then variable costs will decrease almost to zero, while how fixed costs will remain unchanged. The difference between fixed and variable costs is important for every businessman: he can control variable costs, fixed costs are beyond the control of the administration and must be paid regardless of production volumes, even if production is suspended.

So, as output increases while fixed costs remain constant, variable costs increase.

However, at the beginning of the process of increasing output volumes, variable costs will increase at a slow pace for some time. Then variable costs will begin to increase at an accelerating pace. This can be illustrated graphically in the figure below.

Since the fixed cost indicator remains unchanged at all production levels, including zero, the fixed cost graph is a line parallel to the x-axis. The variable cost graph is an ascending line that can be divided into two sections. The first of them is characterized by a slight increase in costs, while the second is more noticeable. This behavior of variable costs is determined by the existence of the law of diminishing marginal returns. While our marginal product (mp) of each subsequent unit of a variable resource is growing, tvc is increasing, but at an insignificant pace. As soon as mp begins to decline, due to the law of diminishing marginal productivity, variable costs begin to rise rapidly, since the production of each subsequent unit of output will require an increasing amount of the variable resource.

In addition to fixed and variable costs in the short term, there is another type of cost - gross(cumulative, total, total). Gross costs (TC) - the sum of fixed and variable costs calculated for each given volume of production: TC = TFC + TVC. Since TFC are equal to some constant, the dynamics of gross costs will depend on the behavior of TVC, i.e., it will be determined by the law of diminishing marginal productivity.

To obtain the total cost curve, it is necessary to sum up the graphs of fixed and variable costs - shift the tvc graph upward along the y-axis by the value TFC, which is unchanged for any Q x (see figure).

In addition to gross costs, the entrepreneur is interested in the costs per unit of production, since it is these that he will compare with the price of the product in order to get an idea of ​​​​the profitability of the company. Costs per unit of output are called average. This group of costs includes:

average fixed costs(AFC) - fixed costs calculated per unit of production:

average variable costs(AVC) - variable costs per unit of production:

average cumulative(total, gross, total) costs (ATS) - total costs per unit of production:

The graph of average fixed costs is represented by a hyperbola (figure below). The graph of average variable costs is an irregular parabola with upward branches. Two segments can be distinguished on this curve. On the first - AVC decreases, on the second - they increase. Such dynamics of average variable costs is associated with the action of the law of diminishing marginal returns. As long as the return on each successive unit of a variable resource increases (the region of increasing marginal returns in the figure below), average variable cost falls. As production volumes increase, the additional product begins to decline - the marginal return of each subsequent unit of a variable resource falls - therefore, to further increase production, an increasing amount of variable resources is required, and average variable costs ABC increase. The graph of average total costs is obtained by vertically summing two curves - AFC and AVC. In this regard, the dynamics of the ATS will be related to the dynamics of average fixed and average variable costs. While both are decreasing, ATCs fall, but when, as production volume increases, the growth of variable costs begins to outpace the fall in fixed costs, ATCs begin to increase.

For the manufacturer, it is of considerable importance how the company's costs change with the production of an additional unit of output. This can be determined using the marginal cost indicator. Marginal cost (MC)- additional costs necessary to produce each subsequent unit of production:

It is necessary to take into account that marginal costs largely depend on variable costs, therefore, similar to the situation with variable costs, as well as with average variable and average total costs, two segments are distinguished on the MC graph: a segment with negative dynamics and a segment with positive dynamics, which is also explained by the existence of the law diminishing marginal returns. The next feature of the marginal cost graph is that it intersects the average variable and average total costs graphs at their lowest points (A and B). This situation is explained as follows: MS are inherently variable in nature, and this type of costs is closely related to average variable costs. As soon as marginal costs become greater than average variables, the latter immediately begin to increase. Therefore, the intersection point of the MC and AVC schedules can only be the lower point of the irregular parabola of average variable costs. The explanation is similar for the relationship between MS and ATS. As long as marginal costs do not exceed average total costs, the latter are reduced, but if the relationship between them is characterized by the inequality MC > ATC, average total costs have a positive trend. In this regard, the point of intersection of the two curves - MC and ATC - will be the minimum point of the average total costs schedule.

Cost reduction is one of the most important sources of increasing the competitiveness of any enterprise. Indeed, at existing market prices for products, lower costs mean additional profit, and therefore prosperity for any manufacturer. If the cost level changes for any reason, the cost schedules shift. In the case of a decrease in costs, the corresponding graphs are shifted down; when costs increase, the graphs are shifted upward along the ordinate axis.

Production costs, their essence and classification

The basis of any economic decision is the answer to the question: how to correlate what is spent on a particular project (costs) and what can be obtained as a result of the project in excess of the costs incurred (profit). Before deciding how much to produce, a firm must analyze costs.

Costs- payment for purchased factors of production. All costs can be divided into two groups: explicit and implicit. Explicit costs are cash payments to suppliers of factors of production. These costs are fully reflected in the company's accounting records, which is why they are also called accounting costs. Implicit costs are the opportunity costs of using resources owned by the firm. The opportunity cost of producing goods and services is measured by the cost of the greatest lost opportunity used to create factors of production. They can also act as the difference between the profit that could be obtained from the most profitable use of resources and the profit actually obtained. However, not all costs (monetary and non-monetary) act as opportunity costs. For any method of using resources, the alternative costs that the manufacturer necessarily bears (the cost of renting premises, costs associated with registering an enterprise, etc.) are not considered alternative. These non-opportunity costs do not participate in the economic choice process. Explicit and implicit costs add up to economic costs. However, not all costs that an enterprise incurs are included in accounting costs, since part of the costs is incurred by the enterprise at the expense of profits (income tax, bonuses paid by the enterprise at the expense of profits, financial assistance to employees, etc.).

Similar to costs, profit can also be accounting and economic.

Accounting Profit is the difference between revenue received and accounting explicit costs. Economic profit is less than accounting profit by the amount of implicit costs.

There is the following relationship between accounting and economic profit:

All economic costs can also be divided into two groups: fixed and variable. Permanent costs are economic costs that do not change as production volume changes. They do not depend on the number of products produced, and the enterprise will bear them even if it does not produce anything at all (for example, maintenance and management costs). Variables costs are economic costs that depend on the volume of production (for example, the cost of variable resources). The sum of fixed and variable costs gives gross costs.

Production costs, regardless of their type, determine the costs of production elements and the costs of a combination of production elements. The relationship between output and the minimum required cost of producing it is described by the cost function associated with the production function. The production function characterizes the relationship between the maximum possible volume of output (Q) and the amount of labor used (3TP) and capital (K). Traditionally, a two-factor production function is used, which has the form:

The graphical form of the production function is an isoquant, which shows different options for using any two costs, the combination of which will bring a given volume of output (Fig. 10.1). A series of isoquants that reflects the maximum achievable output for any given set of factors of production can be represented as an isoquant map.

Rice. 10.1. Isoquant map.

The essence isoquant maps is that the angle of inclination of the isoquant corresponds to the marginal rate of technical replacement of one resource by another. The further the isoquant is from the origin, the greater the volume of output it corresponds to.

Production costs in the short run

To determine the degree of influence of each type of resource on the dynamics of output, an analysis of the production function in time periods is used. The main criterion for identifying time periods is the speed with which the resources involved in production can change their quantitative and qualitative composition. There are instantaneous, short-term and long-term periods.

IN instant In the period, all costs are constant, since the product is released onto the market and therefore it is no longer possible to change either the volume of its production or its costs.

IN short term period, there is a division of costs into fixed and variable. Variable costs in the short term include cash costs for the purchase of raw materials, materials, labor costs for workers, etc. Fixed costs in the short term include: labor costs for management personnel, rent, depreciation of fixed assets.

IN long term the company has the opportunity to purchase not only more raw materials, materials or increase the number of jobs at the enterprise, but also make capital investments. Therefore, it is believed that in the long run all costs are variable.

Let us consider in more detail the short-term period of the enterprise’s activity. In the short run, fixed costs do not change in response to changes in output. The dependence of the dynamics of fixed and variable costs on changes in production volume is graphically presented in Fig. 10.2 and 10.3.

Rice. 10.2. Fixed costs.

Rice. 10.3. Variable costs.

Fixed and variable costs add up to total, or gross, production costs. Graphically, the dependence of total costs on the dynamics of product output can be shown by overlaying graphs of fixed and variable costs (Fig. 10.4).

Rice. 10.4. General costs.

To measure production costs, the categories of average total, average fixed and average variable production costs are used.

Average general costs are equal to the quotient of total costs divided by the number of products produced.

Average constants costs are determined by dividing total fixed costs by the number of products produced.

Average variables costs are determined by dividing total variable costs by the quantity produced.

Average costs are important in determining a firm's profitability: if price equals average costs, then there is no profit. If the price is greater than them, then the company has a profit in the amount of this difference; if it is less, the company incurs losses and may go bankrupt.

To determine the maximum output that a firm can produce, calculate marginal costs. This is the additional cost of producing each additional unit of output compared to output. Marginal costs are important for determining a firm's behavior strategy.

As you can see, all changes in the short term are associated with variable costs. The response of output to changes in variable costs is determined law of diminishing marginal productivity, which states: an increase in the cost of a variable factor from a certain point gives an increasingly smaller increase in the volume of output.

Thus, within the short-term period of the firm's activity, its production capacity is considered fixed. It can use its capacity more or less intensively, but the time at its disposal is not enough to change the size of the enterprise, therefore, in the short term, costs are divided into fixed and variable.

Long-run production costs

In the long term, all costs act as variables, since over a long-term time interval the volumes of not only fixed but also variable costs can change. Long-term time interval analysis is carried out on the basis of long-term average and marginal costs.

Long-run average costs- these are costs per unit of output that can be changed optimally. The peculiarity of changes in long-term average costs is their initial decrease with the expansion of production capacity and growth in production volume. However, the introduction of large capacities ultimately leads to an increase in long-term average costs. The long-run average cost curve on the graph goes around all possible short-run cost curves, touching each of them, but not crossing them. This curve shows the lowest long-run average cost of producing each level of output when all factors are variable. Each short-run average cost curve corresponds to an enterprise whose size is larger than its predecessor. A change in long-run average costs implies a change in the scale of production. Associated with these changes is the concept "economy of scale". Economies of scale can be positive, negative and permanent.

Positive economies of scale(economies of scale) arise when production is organized in such a way that long-term average costs decrease as the volume of output increases. Such an organization of production is possible only under the condition of specialization of production and management. The large scale of production allows for more efficient use of the labor of management specialists due to deeper specialization of production and management. Another important condition for economies of scale is the use of efficient technology.

The cause of diseconomies of scale serves to disrupt the controllability of excessively large production. Under these conditions, long-run average costs increase as output increases.

In conditions where long-term average costs do not depend on the volume of output, there arises constant economies of scale.

Long-run marginal cost are associated with the production of an additional unit of output, when it is possible to change all factors of production in an optimal way. The change in marginal costs can be represented graphically as long-run marginal cost curve(Fig. 10.5).

Rice. 10.5. Long run average cost curve.

This curve shows the increase in costs associated with producing an additional unit of output when all factors of production are variable. The short-run marginal cost curves that correspond to any fixed production will be lower than the long-run marginal cost curve for low output levels, but higher for high output levels where diminishing returns are significant. The long-run marginal cost curve will rise more slowly than the short-run marginal cost curve of any given production. This is explained by the fact that all types of costs in the long run are variable and diminishing returns are less significant. The long-run marginal cost curve intersects the long-run average cost curve at its minimum point.

Thus, the long-term period for the company is sufficient for the company to have time to change the amount of all resources used, including the size of the enterprise. Therefore, all costs in the long run are considered variable.

1. Production costs are divided into explicit and implicit (alternative). Explicit payments represent cash payments to suppliers of factors of production. These costs are fully reflected in the accounting records of the enterprise, therefore they are also called accounting costs.

Implicit costs are the opportunity costs of using resources owned by the firm. The opportunity cost of producing goods and services is measured by the cost of the greatest lost opportunity used to create their factors of production.

2. In the short term, there is a division of costs into fixed and variable. Variables in the short term include cash costs for the purchase of raw materials, materials, labor costs for workers, etc. Fixed costs in the short term include: labor costs for management personnel, rent, depreciation of fixed assets, etc.

3. In the long term, all costs act as variables, since over a long-term time interval the volumes of not only fixed, but also variable costs can change.

When analyzing the operation of an enterprise, changes in production costs and changes in product supply, a distinction is made between short-term and long-term periods of its operation. Short period of operation of the enterprise- this is a period of time during which it is impossible to change production capacity. During this period, they are constant, and production volumes can be changed only by changing the intensity of their use. Long term characterized by a change in production capacity and, consequently, a change in the amount of employed resources.

The total cost of production depends mainly on two factors: the technology used and the prices of various types of inputs. IN current total costs distinguish between fixed and variable costs.

Fixed production costs- these are those that do not depend on the size of the product produced. These may include rent, depreciation, land tax, property tax, heating costs, etc.; Regardless of production volumes, these amounts remain constant. Variable costs- these are those that change along with changes in production volumes (costs of materials, raw materials, energy, transport, labor, etc.). This can be reflected on the graph as follows (Fig. 7.1).

Rice. 7.1.

The fixed cost (FC) curve shows that it does not change with output (Q), so it runs parallel to the horizontal axis. The variable cost (VC) curve shows the increase in variable costs as production volume increases.

Over a short period of time, a firm can combine constant capacity with varying amounts of resources used. How does the volume of production change in this case? In general, the answer to this question is given by law of diminishing returns, or, as it is also called, law of diminishing marginal product: from a certain point, the sequential addition of a variable resource to a constant one gives a decreasing additional or marginal product per each subsequent unit of the added variable resource. This also affects the consistent increase in variable production costs: it is not the same for the production of each additional unit of output.

In total, fixed and variable costs form total production costs. There is a significant difference between the components that form the total costs, which is used in business activities. Variable costs- these are costs that an entrepreneur can control; their value can be changed due to changes in production volumes. Fixed costs are beyond the control of the company administration. Such costs are required to be paid regardless of production volumes.

In addition to the general production costs, it is important for an entrepreneur to know what the average costs are, that is, the costs per unit of production. Average costs also include: average fixed and average variable costs of production.

Marginal cost are the additional costs associated with producing one more unit of output. These costs can be controlled, increased or decreased. The value of marginal costs is related to the marginal productivity of labor. Their relationship is reflected in following rule: The marginal cost of producing each additional unit of output will decrease as long as the marginal productivity of each additional variable resource increases.

Currently, they are becoming increasingly important transaction costs- the company’s costs for preparing and conducting market transactions and agreements, i.e. costs associated with changing forms of value and exchanging property rights. They include the costs of searching for information, losses caused by incomplete information, costs of negotiating, concluding agreements, monitoring their implementation, as well as all costs of protecting property rights and losses from unreliable protection. Distinguish market transaction costs (or external), i.e. the costs of organizing market relations, and non-market (or internal), i.e. costs associated with planning, monitoring the implementation of assigned tasks and obligations, fixed and variable transaction costs etc. All of them are very difficult to measure, but the general trend is clear - they are growing along with the development and complexity of market relations, and at the moment, according to the roughest estimates, in developed countries they account for about 60% of GNP. Therefore, reducing transaction costs is one of the main directions for increasing the efficiency of a company. Reducing such costs is possible by increasing the size of the company. A firm can expand until the cost of organizing an additional transaction within the firm equals the cost of carrying out the same transaction through the market or through another firm. Also, the reduction of transaction costs is facilitated by depriving consumers of the opportunity to choose, the development of “director ethics” (business and informal contacts of managers), and a general increase in the degree of institutionalization of the economy.

The short term is a period of time too short for the enterprise to change its production capacity, but long enough to change the intensity of use of these fixed capacities. During the short-term period, the firm is able to change the volume of production, involving in this process additional quantities of changeable resources (the use of more or less living labor, raw materials and other resources) while production capacity remains unchanged (fixed). But how does output change as more and more variable resources are added to the firm's fixed resources?

In its most general form, the answer to this question is given by the law of diminishing returns, which is also called the “law of diminishing marginal product” or the “law of varying proportions.” This law states that when a variable resource (for example, labor) is sequentially added to a firm's constant (fixed) resource (for example, capital or land), the additional, or marginal, product per each subsequent unit of the variable resource, starting from a certain point, decreases.

Rice. 1. 6a and 1.6b illustrate the law of diminishing returns and help to better understand the relationships between total, marginal and average products.

As an additional variable resource (labor) is added to the constant volume of other resources (land or capital), the resulting total product first increases at a decreasing rate, then reaches its maximum and begins to decrease (Fig. 1.6a).

Marginal product (Fig. 1.6b) reflects changes in total product associated with the investment of each additional unit of labor. Marginal product measures the change in total product associated with the addition of each new worker. Therefore, the three phases through which the total product passes also affect the dynamics of the marginal product. When total product grows at an accelerated rate, marginal product inevitably increases. At this stage, additional workers contribute more and more to total production. Similarly, when total product grows but at a slower rate, marginal product is positive but shrinks. Each worker contributes less to total production compared to his predecessor. When total product reaches its maximum value, marginal product becomes zero. And when total product begins to decline, marginal product becomes negative.

Figure 1.6 Total, marginal and average product curves

The dynamics of the average product reflects the same general relationship “growth - maximum - decrease” between variable labor inputs and production volume, which is characteristic of the marginal product. However, you should pay attention to the relationship between the marginal and average products: where the marginal product exceeds the average, the latter increases; and wherever the marginal product is less than the average product, the latter decreases. It follows that the marginal product curve intersects the average product curve at the point where the latter reaches its maximum.

Fixed, variable and total costs

We already know that over a short period of time, some resources related to a firm's production capacity remain constant. Other resources can be changed. It follows that within the short term, costs can be divided into fixed and variable.

In column (2) of the table. 1.1 the firm's fixed costs are conventionally taken to be 100 dollars. Fixed costs, by definition, exist at any production volume, including zero. In the short term, fixed costs cannot be avoided.

In column (3) of the table. 1.1 we will find that the total amount of variable costs varies in direct proportion to the volume of production. However, the increase in the amount of variable costs associated with an increase in production volume per unit of output is not constant. At the beginning of production expansion, variable costs increase, but their growth rate slows down over time. This continues until the fourth unit of output is produced, but then variable costs begin to increase at an increasing rate for each subsequent unit of output produced.

This behavior of variable costs is due to the law of diminishing returns. Due to the increase in marginal product, the production of each subsequent unit of output will require a smaller and smaller increase in variable resources for some time. And since all units of variable inputs have the same price, the total amount of variable costs will increase at a decreasing rate. But once marginal product begins to decline according to the law of diminishing returns, the production of each subsequent unit of output will require more and more additional variable inputs. The amount of variable costs will thus increase at an increasing pace.

Total costs are the sum of fixed and variable costs for any volume of production. In table 1.1 they are shown in column (4). At zero output, total costs equal the firm's fixed costs.

Variable costs are costs that an entrepreneur is able to manage, that is, change their value over a short period of time by changing the volume of production. Fixed costs, on the contrary, are not subject to ongoing control by the company's management; such costs are unavoidable in the short term and must be paid regardless of production volume.

Specific, or average, costs

Manufacturers are, of course, concerned about their total costs, but they are equally concerned about unit, or average, costs. In particular, it is more appropriate to use indicators of average costs for comparison with the price of the product, which is always set per unit of production. Average fixed, average variable and average total costs are shown in columns (5), (6) and (7) of the table. 1. Let's look at how unit costs are calculated and how they change depending on changes in production volume.

1. Average fixed costs (AFC) of any volume of production are determined by dividing total fixed costs by the corresponding quantity of production:

Since total fixed costs, by definition, do not depend on the volume of output produced, average fixed costs decrease as production increases. As production volume increases, total fixed costs, say $100, are distributed over more and more units of the product produced. In Fig. 1.7, the average fixed cost curve continuously decreases as production volume increases.

2. Average variable costs (AVC) of any volume of production are determined by dividing the total variable costs by the corresponding quantity of production:

Average variable costs initially decline until they reach their minimum, and then begin to rise. Graphically, this is manifested in the concave arc-shaped shape of the average variable cost curve, which is shown in Fig. 1.7.

Since total variable costs are subject to the law of diminishing returns, this should also be reflected in the values ​​of average variable costs, which are calculated on their basis. In the increasing returns stage, each of the first four units of output requires fewer and fewer additional variable inputs to produce. As a result, variable costs per unit of product are reduced. When the fifth unit is produced, average variable costs reach their minimum value and then begin to increase, since diminishing returns create the need for more and more variable inputs to produce each additional unit of output.

The convex average product curve is an inverted concave arc of the average variable cost curve.

3. Average total costs (ATC) of any volume of production are calculated by dividing the total costs by the corresponding quantity of production or by adding the average fixed and average variable costs of a particular volume of production:

ATC= TC/Q= AFC+AVC (1.7)

The values ​​of this indicator are given in column (7) of the table. 1.1. Graphically, average total costs are established by adding vertically the curves of average fixed and average variable costs, as shown in Fig. 1.7. Thus, the segment between the curves of average total and average variable costs indicates the value of average fixed costs for any volume of production.

Marginal cost

From column (4) of table. 1.1 shows that as a result of the production of the first unit of product, total costs increase from 100 to 190 dollars. Therefore, the incremental, or marginal, cost of producing this first unit is $90. (column 8), etc.

Marginal costs can also be calculated based on total variable costs (column 3), since total and total variable costs differ only by a fixed amount of fixed costs ($100). Therefore, the change in total costs is always equal to the change in total variable costs for each additional unit of output.

Marginal costs, by their nature, are more directly and immediately controllable than all others. Decisions about output are typically based on marginal decisions, that is, decisions about whether the firm should produce one more or one less of a product. In combination with the marginal revenue indicator, the marginal cost indicator allows the firm to determine the profitability of a particular change in the scale of production. In Fig. Figure 1.8 shows the marginal cost curve. It drops steeply, reaches its minimum and then rises quite steeply. This reflects the fact that variable costs, and therefore total costs, first grow at a decreasing and then increasing rate.

The marginal cost (MC) curve intersects the average total (ATC) and average variable costs (AVC) curves at the points of the minimum value of each of them. This is explained by the fact that as long as the additional, or marginal, value added to the total (or variable) costs remains less than the average value of these costs, the average value of costs necessarily decreases. And vice versa, when the marginal value is added to the total (or variable) costs and exceeds their average value, then the average value of costs must increase.

The relationship between marginal product and marginal cost is easy to understand from Figure 1.9.

The marginal cost (MC) and average variable cost (AVC) curves are the mirror image of the marginal product (MP) and average product (AP) curves, respectively. Assuming that labor is the only variable cost and the price of labor (the wage rate) remains constant, marginal cost can be calculated by dividing the wage rate by the marginal product. Therefore, as marginal product increases, marginal cost decreases; when marginal product reaches a maximum, marginal cost takes a minimum value; and as marginal product decreases, marginal cost increases. A similar relationship connects the average product and average variable costs.

To determine the degree of influence of each type of resource on the dynamics of output, an analysis of the production function in time periods is used. The main criterion for identifying time periods is the speed with which the resources involved in production can change their quantitative and qualitative composition. There are instantaneous, short-term and long-term periods.

IN instant In the period, all costs are constant, since the product is released onto the market and therefore it is no longer possible to change either the volume of its production or its costs.

IN short term period, there is a division of costs into fixed and variable. Variable costs in the short term include cash costs for the purchase of raw materials, materials, labor costs, etc. Fixed costs in the short term include: labor costs for management personnel, rent, depreciation of fixed assets.

IN long term the company has the opportunity to purchase not only more raw materials, supplies or increase the number of jobs at the enterprise, but also make capital investments. Therefore, it is believed that in the long run all costs are variable.

Let us consider in more detail the short-term period of the enterprise’s activity. In the short run, fixed costs do not change in response to changes in output. The dependence of the dynamics of fixed and variable costs on changes in production volume is graphically presented in Fig. 10.2 and 10.3.

Rice. 10.2. Fixed costs.

Rice. 10.3. Variable costs.

Fixed and variable costs add up to total, or gross, production costs. Graphically, the dependence of total costs on the dynamics of product output can be shown by overlaying graphs of fixed and variable costs (Fig. 10.4).

Rice. 10.4. General costs.

To measure production costs, the categories of average total, average fixed and average variable production costs are used.

Average general costs are equal to the quotient of total costs divided by the number of products produced.

Average constants costs are determined by dividing total fixed costs by the number of products produced.

Average variables costs are determined by dividing total variable costs by the quantity produced.

Average costs are important in determining a firm's profitability: if price equals average costs, then there is no profit. If the price is greater than them, then the company has a profit in the amount of this difference; if it is less, the company incurs losses and may go bankrupt.

To determine the maximum output that a firm can produce, calculate marginal costs. This is the additional cost of producing each additional unit of output compared to output. Marginal costs are important for determining a firm's behavior strategy.

As you can see, all changes in the short term are associated with variable costs. The response of output to changes in variable costs is determined law of diminishing marginal productivity, which states: an increase in the cost of a variable factor from a certain point gives an increasingly smaller increase in the volume of output.

Thus, within the short-term period of the firm's activity, its production capacity is considered fixed. It can use its capacity more or less intensively, but the time at its disposal is not enough to change the size of the enterprise, therefore, in the short term, costs are divided into fixed and variable.