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![Page 1: 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.](https://reader036.fdocuments.in/reader036/viewer/2022062307/551b1869550346f70d8b62d7/html5/thumbnails/1.jpg)
Costs and production
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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
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Example
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Example (cont.)
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Fixed costs
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Variable costs
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TC, TVC, and TFC
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Average fixed cost (AFC) = TFC / Q
Average fixed cost
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Average variable cost (AVC) = TVC / Q
Average variable cost
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Average total cost (ATC) = TC / Q ATC = AFC + AVC (since TFC + TVC = TC)
Average total cost
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Marginal cost (MC) = cost of an additional unit of output
Marginal cost
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Average fixed cost
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Note that the MC curve intersects the AVC and ATC at their respective minimum points
AVC, ATC, and MC
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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
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Long-run average total cost (LRATC)
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Minimum efficient scale = lowest level of output at which LRATC is minimized
Minimum efficient scale
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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
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Total physical product (TPP)
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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
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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
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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)
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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
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TPP
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APP rises when MPP > APP
APP falls when MPP < APP
APP is maximized when MPP = APP
Relationship of APP and MPP
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http://www.oswego.edu/~kane/eco101.htm Czarny B. „Podstawy ekonomii”, PWE, 2002
Bibliography: