The Costs of Production 2

The Costs of Production
Output and Costs

Prepared by Ms. Craigwell
(September 2020).
Objectives
After discussion, students will be able to
- identify the costs associated with production –
total and average costs, correctly.
- differentiate correctly, between short run and
long run costs.
Total Costs
Total cost can be calculated by adding fixed
costs and variable costs at different levels of
output.
TC = FC + VC
Table showing Total Cost
Output per Fixed Cost ($) Variable Cost Total Cost ($)
week ($)
0 200 0 200
5 200 25 225
10 200 40 240
15 200 50 250
20 200 70 270
Diagram of Total Cost
Average Cost
Average Cost is the cost of producing a unit of
product at a particular output.
To calculate average cost, use the following formula
AC = TC/Output
AC – Average Cost
TC – Total Cost
From the table, average cost of producing 10
products would be $24 (240/10). The average cost
of producing 20 products would be $13.50 (270/20)
Diagram of the Average Cost
The Shape of the Average Cost Curve
It is important to know and understand the

shape of a typical average cost curve
Importance of the Average Cost Curve
Shape
1. Average fixed cost is falling as output levels
increase. This effect pulls the curve down at a
slower and slower rate. So if fixed cost are $1000,
producing two units rather than one will lower the
curve from $1000 to produce 1 unit, to $500 to
produce 2 units. However, at much higher levels of
output, for example producing 1000 units rather
than 999, you will only be reducing the average
fixed cost from $1.11 to $1.00 – that is, by just a
few cent.
2. Average variable cost falls initially as the firm
is able to combine its factors of production more
efficiently. However, there comes a point at
which inefficiencies creep into the production
plant. The lowest point on the average cost
curve shows the point at which the business is
combing its resources most efficiently. We call
this lowest point the optimum output level.
Marginal Cost
Marginal cost of production, is the additional cost of
producing one additional unit of output. For
example, if the total cost of producing 100 units of a
good is $1000 and the total cost of producing 101
units is $1009, then the marginal cost of producing
the 101st unit is $9. the importance of knowing the
marginal cost is that when marginal costs are lower
than marginal revenues (the extra receipt from
producing the additional unit), it will be worth
expanding production.
Diagram of Marginal Cost Curve
Formula
MC = ∆TC / ∆Q
∆- TCn – TC n-1
Short – run and long – run cost
• Time periods
Time periods do not relate to a specifically
defined period of time, such as 3 months or 1
year. They simple relate to the period needed to
increase the quantity and/or quality of fixed
assets available to a business.
In the short – term an organization has available a
set quantity of fixed factors of production; it cannot
change the quantity of fixed capital. For example, a
factory that produces men’s shirts may be a small
building with five machines. It would take time for
the business to build a larger factory and buy
additional machines.
The long period is the period in which the quantity
and/or quality of fixed assets available to the
company can be increased.
Short – run Cost
The short period is the period in which fixed
factors cannot be altered.
The average cost curve has a characteristic U
shape, showing that initially average cost fall as
output is increased with a given quantity of fixed
factors of production. Beyond the optimum
point, production becomes less efficient as more
variable factors are combined with fixed factors.
Diagram of the Short Run period
Long – run Cost
• In the long period fixed factors can be
increased.
• The long term average cost curve is drawn
through the optimum point of the short term
average cost curves.
• A long run average cost curve shows the cost
per unit of output in the long run. All points
on the line represent least cost factor
combinations.
Long Run Cost Curve
Home Work
1. The total cost of producing 100 units is
$1000. 200 unit is $1800, and 300 unit is
$3300. At which of these eves of output is
the lowest average cost?
2. In economic terms, how long is the short
period?
3. What shape is the average cost curve? Why
does it have this shape?

The Costs of Production 2

Uploaded by

Copyright:

Available Formats

The Costs of Production 2

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Costs of Production 2

Uploaded by

Copyright:

Available Formats

The Costs of Production

Output and Costs

It is important to know and understand the

You might also like