With diminishing marginal product, the total variable cost increases at an increasing rate. Total costs is the sum of total fixed costs and total variable costs, thus total cost begins at the level of fixed costs and is shifted up above the total variable cost by the amount of the fixed cost.
When we discuss costs, we are going to refer to our output as quantity denoted by a Q, instead of total product, denoted by the TP. We can also evaluate costs looking at the marginal costs and average costs. Marginal cost is the change in total cost divided by the change in output. Since fixed costs do not change with output, marginal cost can also be computed by dividing the change in total variable cost by the change in quantity.
Note that we did not compute the marginal or average values at zero output. Keep in mind that we never produce where marginal product is negative, i. So we will graph only the output of one to eight workers. We often do not graph the average fixed costs, because average fixed cost is represented by the vertical distance between ATC and AVC. Another important relationship can also be seen in these figures, and that is marginal cost intersects average variable and average total costs at their minimums.
Recall that a similar observation was made for marginal product and average product, only in that case, marginal product intersected average product at its maximum. These relationships result from how productivity determines costs.
Consider, for example, when a business adds one more worker who causes productivity to improve. This would mean that output is increased more for this worker than for previous workers! On the margin, what do you think will happen to the additional cost with respect to output?
Clearly the cost of that additional output will be lower because the firm is getting more output per worker. This results provides an interesting relationship between marginal cost and marginal product.
When marginal product is at a peak, then marginal cost must be at a minimum. This will always hold true, and as a result, marginal cost is the mirror image of marginal product. When marginal product is rising, the marginal cost of producing another unit of output is declining and when marginal product is falling marginal cost is rising. Similarly, when average product is rising, average variable cost is falling, and when average product is falling, average variable cost is rising since average product corresponds the variable input changing, this important relationship exists with average variable cost and NOT average total cost.
Finally, when total product is increasing at an increasing rate the total cost is increasing at a decreasing rate. When total product is increasing at a decreasing rate, the total cost is increasing at an increasing rate. The long run is that period of time that would allow all inputs or resources to become variable. In the long run, there are no fixed costs and a firm can decide the amount of each input. Think of a business just starting and they could determine the building size, the amount of equipment, the number of workers, etc.
What would be the ideal quantity of each input? Up until now, we have been considering costs in the short-run, i. Now we want to consider what happens to costs when all inputs are variable, i.
Typically, the plant size can only be changed in the long-run, that is, it is often the last input to become variable. In the long-run, we want to select a plant size that gives us the lowest costs for our level of output. However, if our desired output is 40 units, then the medium size plant is able to produce at a lower average cost than the small plant.
Businesses often face the challenge of knowing what quantity of inputs i. Assuming all factors are variable, the long run average cost curve shows the minimum average cost of producing any given level of output. The long-run average cost curve is obtained by combining the possible short-run curves i.
More particularly, it is a line that is tangent to each of the short run average cost curves. If increasing output reduces the per unit cost, the firm is experiencing economies of scale which means larger plant sizes have lower average total costs at their respective minimum points.
We typically see this when plant sizes are small. This can be explained based on a variety of reasons. As plant capacity increases, firms are able to specialize their labor and capital to a greater degree. Workers can specialize on doing a limited number of tasks extremely well. Another factor contributing to economies of scale is the spreading out of the design and start up costs over a greater output amount.
For many products, significant costs are in design and development. For example in the movie industry, the marginal cost of making a second copy of a movie is nearly zero and as copies of the movie are produced, the average cost declines significantly. Some film makers will film the movie and its sequel at the same time to lower the per unit costs.
As larger quantities are produced, the inputs used can be purchased in larger quantities and often at a lower per unit cost. The per unit cost when ordering a rail car or semi load of material is less than when purchasing the inputs in small quantities. Also spreading the cost of placing the order over more units, reduces the per unit cost. The cost structure of the industry determines the shape of its long run average cost curve. Some industries are able to reach the lowest per unit cost with a relatively small plant size or scale of operation.
Other industries exhibit a natural monopoly where the long run average cost curve continues to decline over the entire range of a product demand. In this type of an industry, it is difficult for other firms to enter and compete since the existing firm has a lower per unit cost.
The minimum efficient scale is the plant size or scale of operation that a firm must reach to obtain the lowest average cost or exhaust all economies of scales. The region where long run average costs remain unchanged as plant size increases is known as constant returns to scale. Diseconomies of scale occurs when average costs increase as plant size increases. As output increases the amount of red tape would increase as it becomes necessary to hire managers to manage managers.
Efficiency is lost as the size of the operation becomes too large. If an auto manufacturer decided to produce all of its output at one location, think of the size of the operation. Moving inputs into and out of the plant would raise costs significantly. Likewise, it would be difficult to find the needed workforce all in one city.
Recognizing the diseconomies that could exist, auto manufacturers have instead chosen to produce their output at a number of different plants spread out throughout the world. Consider another example. Think of what it would cost to make your own car.
How many hours of design would it take? As you go to build the vehicle, think of the specialized tools that you would need to make the engine, frame, windows, ties, etc. Even if you built a car for each member of your family or every household in your town, the cost per vehicle would enormous because at this scale of operation, the degree of specialization is limited.
Companies that do make cars produce thousands or even millions which allow them to specialize their capital and labor making the per unit cost significantly lower.
Think about this additional example. Popular movies will sell hundreds of thousands of copies, which allows the film makers to specialize their workforce and equipment since their scale of operation will be significantly greater. On the other hand, technical education films cost significantly less to produce but only a few hundred copies will be sold. Since their scale of operation is small, they are unable to gain the benefits of economies of scale that would allow them more efficient use of labor and capital.
While economies of scale lowers the per unit cost as more of the same output is produced, economies of scope lowers the per unit cost as the range of products produced increases. For example, if a restaurant that provides lunch and dinner began to offer breakfast, the fixed costs of the kitchen equipment and the seating area could be spread out over a larger number of meals served decreasing the overall cost per meal.
Likewise a gas station that already must have a service attendant and building can lower the per unit cost by providing convenience store items such as drinks and snacks. Since the cost of producing or providing these products are interdependent, providing both lowers the cost per unit.
Section Production Production Functions We are now going to focus on the what is behind the supply curve. Marginal Product Total product is simply the output that is produced by all of the employed workers. Agricultural Law and Management. Based on the assumptions of a goal of profit maximization and making decisions in the short run, combined with our understanding of diminishing marginal productivity, the question is "what level of input should a manager use and what level of output should the manager produce to maximize profit.
The relationship between the level of variable input and level of output can be illustrated with a production function. The production function could be described as a combination or series of enterprise analyses wherein each point on the production function represents a different enterprise; that is, a different recipe or combination of fixed inputs and variable input.
The idea that the production function is a series of enterprises is expanded on in subsequent sections. No business operates with one variable input and one fixed input. Instead, it may be easier to think about fixed and variable inputs as a collection of resources. Any resource or input that cannot be altered during the production period would be considered part of the fixed inputs and inputs that can be varied would be considered variable inputs.
In a farm setting during a production season, there may not be enough time to acquire more land, buildings, equipment or labor. These would be fixed inputs. But there may be enough time to borrow more capital with which to buy more fertilizer, seed, pesticides, fuel. These would be the variable inputs. However to simplify illustrating the concept of diminishing marginal productivity, the examples often assume a collection or group of fixed inputs and one variable input. First, as the level of variable input is increased, the level of output:.
Second, managers should not use so much variable input that the output actually declines. In this example, the manager would not use more than 15 units because the 16th unit does not increase production, and using more than 16 units actually decreases production. The economic concept of marginal physical product can help explain this point.
Graph 2. Marginal physical product MPP is the change in the level of output due to a change in the level of variable input; restated, the MPP is the change in TPP for each unit of change in quantity of variable input. Graph 5. Third, there is a minimum level of variable input that the manager should use. If a manager decides to use some of the variable input; is there a minimum quantity of variable input the manager should use? The answer is yes, but why is the answer yes?
Consider the example illustrated in the table. Using 1 unit of variable input will result in the production of 1 unit of output. However, using 2 units of variable input will result in the production of 3 units of output. At the first level of production, the variable input, on the average produces just one unit of output. At the second level, each unit of variable input produces 1. Thus increasing the level of input increases that quantity of output for each unit of variable input.
Economic theory refers to quantity of output per unit of variable input as the average physical product APP. Graph 3. As long as the APP is increasing, the manager will use more units of the variable input. In this situation, APP increases until the manager is using 11 units of variable input.
This is the minimum number of units of variable input the manager will use, if the variable input is used. Economic theory refers to the portion of the production function where the APP is increasing as Stage I.
0コメント