Average and marginal costs. Long-run production costs

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 production produce, the firm must analyze costs.

Costs- ϶ᴛᴏ payment for acquired factors of production. All costs can be divided into two groups: explicit and implicit. Explicit costs – ϶ᴛᴏ cash payments to suppliers of production factors. These costs are fully reflected in the accounting records of the enterprise, 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. It is worth noting that they can also act as the difference between the profit that could be obtained with the most profitable use of resources and the actual profit received. 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 costs. These non-alternative costs do not participate in the process of economic choice. Explicit and implicit costs add up to economic costs. At the same time, not all costs incurred by the enterprise 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 - the difference between revenue received and accounting explicit costs. Economic profit is less than accounting profit by the amount of implicit costs.

Between accounting and economic profit there is the following relationship:

All economic costs can also be divided into two groups: constant and variable. Permanent costs are economic costs that do not change when production volume changes. It is worth noting that they do not depend on the number of products produced, and the company will bear them even if it does not produce anything at all (for example, maintenance and management costs) Variables costs - ϶ᴛᴏ economic costs, which depend on the volume of production (for example, costs for 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:

Graphic form production function serves as an isoquant, which shows various options the use of any two costs, the combination of which will bring a given volume of output (Fig. 10.1) A series of isoquants, which demonstrates the maximum achievable output for any given set of factors of production, can be presented in the form of an isoquant map.

Figure No. 10.1. Isoquant map.

The essence isoquant maps is that the slope of the isoquant ϲᴏᴏᴛʙᴇᴛϲᴛʙis 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.
It is worth noting that 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 s.

IN instant During 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, supplies, 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 large quantity raw materials, materials or increase the number of jobs in the enterprise, but also make capital investments. Therefore it is believed that in long period all costs will be variable.

Let's study 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.

Figure No. 10.2. Fixed costs.

Figure No. 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)

Figure No. 10.4. General costs.

To measure production costs, the categories of average total, average fixed and average variable production costs can be 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 cost is important in determining a firm's profitability: if price equals average cost, then there is no profit. If the price is greater than them, then the company has a profit in the amount of the 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 cost. 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. Reaction of output to change variable costs 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.

Based on all of the above, we come to the conclusion that within the short-term period of a company’s activity, its production capacity is considered fixed. It is worth noting that 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, so 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- ϶ᴛᴏ costs per unit of output, which can be changed optimally.
It is worth noting that the peculiarity of changes in long-term average costs is their initial decrease with expansion production capacity and growth in production volume. At the same time, 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-term average cost of production of each level of output when all factors are variable. Note that each short-term average cost curve represents an enterprise whose size is larger than the previous one. 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.

It is worth saying - 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. It is precisely this organization of production that 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. Other important condition economies of scale - the use of efficient technology.

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

Figure No. 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 apply to any fixed production will be below the long-run marginal cost curve for low production volumes, but higher for high production volumes, for which 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 will be variable and diminishing returns are less significant. The long-run marginal cost curve intersects the long-run average cost curve at its minimum point.

Based on all of the above, we come to the conclusion that the long-term period for the company will be 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 are cash payments to suppliers of factors of production. These costs are fully reflected in the accounting records of the enterprise, 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 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.

The purpose of creating a business - opening a company, building a plant with the subsequent release of planned products - is to make a profit. But increasing personal income requires considerable costs, not only moral, but also financial. All monetary expenses aimed at producing any good are called costs in economics. To work without losses, you need to know the optimal volume of goods/services and the amount of money spent to produce them. To do this, average and marginal costs are calculated.

Average costs

With an increase in the volume of production, the costs dependent on it grow: raw materials, wage essential workers, electricity and others. They are called variables and have various addictions at different quantities release of goods/services. At the beginning of production, when the volumes of goods produced are small, variable costs are significant. As production increases, costs decrease due to economies of scale. However, there are expenses that an entrepreneur bears even with zero production of goods. These costs are called fixed costs: public utilities, rent, administrative staff salaries.

Total costs are the sum of all costs for a specific volume of goods produced. But to understand the economic costs invested in the process of creating a unit of goods, it is customary to turn to average costs. That is, the quotient of total costs to output volume is equal to the value of average costs.

Marginal cost

Knowing the value of the funds spent on the sale of one unit of good, it cannot be argued that an increase in output by another 1 unit will be accompanied by an increase in total costs, in an amount equal to the value of average costs. For example, to produce 6 cupcakes, you need to invest 1200 rubles. It’s easy to immediately calculate that the cost of one cupcake should be at least 200 rubles. This value is equal to average costs. But this does not mean that preparing another pastry will cost 200 rubles more. Therefore, to determine the optimal volume of production, it is necessary to know how much money will be required to invest in order to increase output by one unit of the good.

Economists come to the aid of the firm’s marginal costs, which help them see the increase in total costs associated with the creation of an additional unit of goods/services.

Calculation

MC - this designation in economics has marginal costs. They are equal to the quotient of the increase in total expenses to the increase in volume. Since the increase in total costs in the short term is caused by an increase in average variable costs, the formula can look like: MC = ΔTC/Δvolume = Δaverage variable costs/Δvolume.

If the values ​​of gross costs corresponding to each unit of production are known, then marginal costs are calculated as the difference between adjacent two values ​​of total costs.

Relationship between marginal and average costs

Economic solutions for management economic activity must be accepted after marginal analysis, which is based on marginal comparisons. That is, the comparison of alternative solutions and determination of their effectiveness occurs by assessing the incremental costs.

Average and marginal costs are interrelated, and changes in one relative to the other are the reason for adjusting the volume of output. For example, if marginal costs are less than average costs, then it makes sense to increase output. It is worth stopping the increase in production volume in the case when marginal costs are higher than average.

The equilibrium situation will be in which marginal costs are equal to the minimum value of average costs. That is, there is no point in increasing production further, since additional costs will increase.

Schedule

The presented graph shows the company's costs, where ATC, AFC, AVC are the average total, fixed and variable costs, respectively. The marginal cost curve is denoted MC. It has a shape convex to the x-axis and at minimum points intersects the curves of average variables and total costs.

Based on the behavior of average fixed costs (AFC) on the graph, we can conclude that increasing the scale of production leads to their reduction; as mentioned earlier, there is an effect of economies of scale. The difference between ATC and AVC reflects the amount of fixed costs; it is constantly decreasing due to the approach of AFC to the x-axis.

Point P, characterizing a certain volume of product output, corresponds to the equilibrium state of the enterprise on the market. If you continue to increase volume, then costs will need to be covered by profits as they begin to increase sharply. Therefore, the company should settle on the volume at point P.

Marginal Revenue

One of the approaches to calculating production efficiency is to compare marginal costs with marginal revenue, which is equal to the increase in funds from each additional unit of goods sold. However, the expansion of production is not always associated with an increase in profits, because the dynamics of costs are not proportional to volume and with an increase in supply, demand and, accordingly, the price decrease.

A firm's marginal cost is equal to the price of the good minus marginal revenue (MR). If marginal cost is lower than marginal revenue, then production can be expanded, otherwise it must be curtailed. By comparing the values ​​of marginal costs and income, for each value of output, it is possible to determine the points of minimum costs and maximum profit.

Profit maximization

How to determine the optimal production size to maximize profits? This can be done by comparing marginal revenue (MR) and marginal cost (MC).

Each produced new product adds the amount of marginal revenue to total income, but at the same time increases total costs by the amount of marginal costs. Any unit of output whose marginal revenue exceeds its marginal cost should be produced because the firm will receive more revenue from selling that unit than it will add to costs. Production is profitable as long as MR > MC, but as output increases, rising marginal costs due to the law of diminishing returns will make production unprofitable because they will begin to exceed marginal revenue.

Thus, if MR > MC, then production needs to be expanded if MR< МС, то его надо сокращать, а при MR = МС достигается равновесие фирмы (максимум прибыли).

Features when using the rule of equality of limit values:

• The condition MC = MR can be used to maximize profit in the case when the cost of the good is higher than the minimum value of average variable costs. If the price is lower, the company does not achieve its goal.
• Under conditions of pure competition, when neither buyers nor sellers can influence the formation of the cost of a good, marginal revenue is equivalent to the price of a unit of goods. This implies the equality: P = MC, in which marginal costs and marginal price are the same.

Graphical representation of a firm's equilibrium

Under pure competition, where price equals marginal revenue, the graph looks like this.

Marginal costs, the curve of which intersects the line parallel to the x-axis, characterizing the price of the good and marginal income, form a point showing the optimal sales volume.

In practice, there are times when doing business when an entrepreneur should think not about maximizing profits, but minimizing losses. This happens when the price of a good decreases. Do not stop production the best way out, since fixed costs must be paid. If the price is less than the minimum value of gross average costs, but exceeds the value of the average variables, then the decision must be based on the output of goods in the volume obtained at the intersection of the marginal values ​​​​(income and costs).

If the price of a product in a purely competitive market has fallen below the firm's variable costs, then management must take the responsible step of temporarily stopping the sale of goods until the cost of an identical good rises in the next period. This will trigger an increase in demand due to a decrease in supply. An example is agricultural firms that sell products in the autumn-winter period, and not immediately after harvest.

Long term costs

The time interval during which changes in the production capacity of an enterprise can occur is called the long-term period. The firm's strategy must include cost analysis for the future. In the long time frame, long-term average and marginal costs are also considered.

With the expansion of production capacity, there is a decrease in average costs and an increase in volumes up to a certain point, then costs per unit of output begin to increase. This phenomenon is called economies of scale.

The long-run marginal cost of an enterprise shows the change in all costs due to an increase in output. The average and marginal cost curves relate to each other over time in a similar way to the short-term period. The main strategy in the long run is the same - it is determining production volumes by means of the equality MC = MR.

Production costs in the long run have one feature, since they are variable in nature. In this case, the enterprise can increase or reduce capacity, while it has a sufficient amount of time to make a decision to leave the market or enter it by moving from other industries.

Production costs in the long run are not divided into average constants and average variables; average costs are analyzed for each unit of production. They are at the same time both average and variable costs. If we consider three short-term periods, then graphs of short-term average costs are built, and the average cost curve for any volume of output will be a line consisting of three parabolas, including graphs of short-term average costs. Thus, we get a schedule of average costs in the long run.

Long-Run Average Cost Curve

The long-run average cost curve is a curve that follows an infinite number of short-run average cost schedules. Graphs of short-term average costs touch the average cost curve at minimum points.

Thus, the long-term cost curve can reflect the minimum cost of producing a unit of output, which ensures any volume of production, provided that the enterprise has time to change all production factors.

The long run also has marginal costs. Long-run marginal costs can reflect a change total amount company costs due to changes in output finished products per unit when the enterprise is free to change all types of costs. Long-run average and marginal cost curves can be related to each other in the same way as short-run cost curves. Part of the marginal cost curve increases and crosses the long-run average cost curve at the minimum point.

Economies of scale

The curve reflecting production costs in the long run is characterized by three segments. The first segment is characterized by long-term average costs, which are decreasing. On the second they will be constant, on the third they will increase.

There are situations when there is an intermediate segment on the graph with approximately the same level of costs per unit of production at different meanings output volume. The long-term average cost curve has an arcuate character, it has a decreasing and increasing section, which is explained by the pattern of positive and negative effects of increasing scale of production.

Economies of scale positive character reflects a conditional increase in the scale of production. This is due to a decrease in unit costs as the volume of manufactured products increases.

The value of economies of scale

Positive economies of scale (growing, increasing returns to production) occur when volumes grow faster than costs rise. Consequently, the average costs of the enterprise will fall. This situation that exists at the enterprise is explained by the descending nature of the straight line in the first segment. This may lead to the following situations:

1. increased specialization of labor (productivity increases, costs fall),
2. increasing specialization of managerial work,
3. most effective application basic and working capital and capital (the factor is more accessible to large enterprises than to small firms),
4. savings from using secondary resources

Examples of problem solving

EXAMPLE 1

Let's imagine that a small manufacturing enterprise first deployed minimal production capacity, and then, thanks to successful economic activity expanded more and more. Initially, for some time, the expansion of production capacity will be accompanied by a decrease in average total costs. However, the introduction of more and more capacity will lead to an increase in average total costs.

Figure 4.9 illustrates this pattern for five different enterprise sizes. Curve ATC 1 shows the dynamics of average total costs for the smallest of five enterprises, curve ATC 5 for the largest.

The construction of increasingly larger enterprises will lead to a reduction in the minimum cost of producing a unit of output until the size of a third enterprise is reached. However, beyond this limit, expansion of production capacity will mean an increase in the minimum level of average total costs.

Thin lines perpendicular to the horizontal axis. They show the production volumes at which the enterprise should change its size in order to ensure the lowest possible unit production costs.

In the figure, the LATC curve is the long-run average total cost curve or, as it is often called, the choice curve (or planning curve) of the enterprise.

The long-run average cost curve (LATC) shows the lowest cost of producing any given level of output, while allowing for the possibility of changing all factors of production optimally in order to minimize costs.

End of work -

This topic belongs to the section:

Economy

Belgorod State Technological University named after V. G. Shukhov.. Under the general scientific editorship of Doctor of Economics, Prof. L. G. Galkin.

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