Fixed Cost (TFC), variable costs(TVC) and their schedules. Determination of total costs

In the short term, part of the resources remains unchanged, and part changes to increase or decrease the total output.

Accordingly, the economic costs of the short-term period are divided into fixed and variable costs. In the long run, this division loses its meaning, since all costs can change (that is, they are variable).

Fixed costs (FC)- this is a cost that does not depend in the short run on how much the firm produces. They represent the costs of its constant factors of production.

Fixed costs include:

• - payment of interest on bank loans;
• - depreciation deductions;
• - payment of interest on bonds;
• - salary of management personnel;
• - rent;
• - insurance payments;

Variable Cost (VC)- these are costs that depend on the volume of the firm's production. They represent the costs of the variable factors of production of the firm.

Variable costs include:

• - wage;
• - fare;
• - electricity costs;
• - costs of raw materials and supplies.

From the graph, we see that the wavy line depicting variable costs rises up with an increase in production.

This means that with an increase in production, variable costs increase:

at first, they grow in proportion to the change in production (until point A is reached)

then savings in variable costs in mass production are achieved, and their growth rate decreases (until point B is reached)

the third period, reflecting the change in variable costs (movement to the right from point B), is characterized by an increase in variable costs due to a violation of the optimal size of the enterprise. This is possible with an increase in transport costs due to the increased volumes of imported raw materials, volumes of finished products that must be sent to the warehouse.

Total (gross) cost (TC)- these are all the costs at a given point in time required for the production of a particular product. TC = FC + VC

Formation of the curve of average long-term costs, its graph

Economies of scale are a long-term phenomenon when all resources are variable. This phenomenon should not be confused with the known law of diminishing returns. The latter is a phenomenon of an exceptionally short-term period, when constant and variable resources interact.

At constant prices for resources, economies of scale determine the dynamics of costs in the long run. After all, it is he who shows whether the increase in production capacity leads to a decrease or increase in returns.

It is convenient to analyze the efficiency of resource use in a given period using the long-term average cost function LATC. What is this feature? Suppose that the Moscow government decides to expand the city-owned AZLK plant. With the available production capacity, minimization of costs is achieved with a production volume of 100 thousand vehicles per year. This state of affairs is displayed by the ATC1 short-term average cost curve corresponding to a given production scale (Figure 6.15). Let the introduction of new models, which are planned to be released in conjunction with Renault, will increase the demand for cars. The local design institute proposed two plant expansion projects corresponding to two possible production scales. The ATC2 and ATC3 curves are the short run average cost curves for these large scale production. When deciding on the option of expanding production, the management of the plant, in addition to taking into account financial investment opportunities, will take into account two main factors, the amount of demand and the value of costs with which the required volume of production can be produced. It is necessary to select the scale of production that will ensure the satisfaction of demand at the lowest cost per unit of production.

Long-term average cost curve for a specific project

Here, the points of intersection of adjacent curves of short-term average costs (points A and B in Fig. 6.15) are of fundamental importance. Comparison of the volumes of output and the amount of demand corresponding to these points determine the need to increase the scale of production. In our example, if the amount of demand does not exceed 120 thousand vehicles per year, it is advisable to carry out production at a scale described by the ATC1 curve, that is, at existing capacities. In this case, the achievable unit costs are minimal. If demand rises to 280,000 vehicles per year, then a plant with an ATC2 production scale would be most appropriate. This means that it is advisable to carry out the first investment project. If the demand exceeds 280 thousand cars a year, it will be necessary to implement a second investment project, i.e. to expand the production scale to the size described by the ATC3 curve.

In the long term, there will be enough time to implement any possible investment project. Therefore, in our example, the long-run average cost curve will consist of successive sections of the short-term average cost curves up to the points of their intersection with the next such curve (the thick wavy line in Figure 6.15).

Thus, each point on the LATC long-run cost curve determines the minimum achievable cost per unit of output for a given volume of production, taking into account the possibility of changing the scale of production.

In the limiting case, when a plant of the appropriate scale is built for any amount of demand, that is, there are infinitely many curves of short-term average costs, the curve of long-term average costs changes from a wave-like into smooth line enveloping all curves of short-run average costs. Each point of the LATC curve is a tangency point with a specific ATCn curve (Figure 6.16).

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 an increase in personal income requires considerable expenses, and not only moral, but also financial. All monetary expenditures aimed at the production of any good are called costs in the economy. To work without losses, you need to know the optimal volume of goods / services and the amount of funds spent for their release. For 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, wages of basic workers, electricity and others. They are called variables and have different addiction at different quantities release of goods / services. At the beginning of production, when the volume of goods produced is small, variable costs are significant. As the number of products increases, the level of costs decreases as there is an effect of economies of scale. However, there are such costs that the entrepreneur incurs even with zero production of goods. Such costs are called constant: utilities, rent, salaries of administrative personnel.

Total costs are the aggregate of all costs for a specific amount of goods produced. But to understand the economic costs invested in the process of creating a unit of goods, it is customary to refer to average costs. That is, the quotient of total costs to the volume of output 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 is easy to calculate right away that the cost of one cupcake should be at least 200 rubles. This value is equal to the average cost. But this does not mean that the preparation of one more baked goods will cost 200 rubles more. Therefore, in order to determine the optimal volume of production, it is necessary to know how much it will take to invest in order to increase output by one unit of good.

The marginal cost of the firm comes to the aid of economists, which helps to see the increase in the total cost associated with the creation of an additional unit of goods / services.

Payment

MS - such a designation in economics has marginal costs. They are equal to the quotient of the increase in total costs 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 be of the form: MC = ΔTC / Δvolume = Δaverage variable costs / Δvolume.

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

Relationship between marginal and average costs

Economical management solutions economic activity should be taken after margin analysis, which is based on marginal comparisons. That is, comparison of alternative solutions and determination of their effectiveness occurs by assessing the increment in costs.

Average and marginal costs are interrelated, and the change in one in relation to the other is 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 when the marginal costs are above average.

Equilibrium will be a situation in which marginal costs are equal to the minimum value of average costs. That is, it makes no sense to further increase production, since the additional costs will grow.

Schedule

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

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

Point P, which characterizes a certain volume of product output, corresponds to the equilibrium state of the enterprise in the market. If you continue to increase the volume, then the costs will need to be covered by profits, as they will start to rise sharply. Therefore, the firm should focus on volume at P.

Marginal income

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

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

Profit maximization

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

Each new product produced adds to the total income the amount of marginal income, but at the same time increases and 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 the sale of that unit than it will add to costs. Production is profitable as long as MR> MC, but with an increase in the volume of output, the increasing marginal costs due to the action of the law of diminishing returns will make production unprofitable, since they will begin to exceed the marginal income.

Thus, if MR> MS, then production must 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 profits when the value of the good is higher than the minimum value of the 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 value of the good, the marginal revenue is equivalent to the unit price of the good. This implies the equality: P = MC, in which the marginal cost and the marginal price are the same.

A graphical representation of the equilibrium of a firm

In a purely competitive environment, when the price is equal to the marginal revenue, the graph looks like this.

The marginal costs, the curve of which crosses the line parallel to the abscissa 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. Stopping production is not 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 should be based on the output of goods in the volume obtained at the intersection of marginal values ​​(income and costs).

If the product price is pure competitive market fell to a point below the variable costs of the firm, then the management must take a responsible step and temporarily stop selling goods until the value of an identical good rises in the next period. This will be the impetus for 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 the enterprise can occur is called the long-term period. The firm's strategy should include a cost analysis for the future. Long-term average and marginal costs are also considered in the long run.

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 grow. This phenomenon is called economies of scale.

The long-term marginal cost of an enterprise shows the change in all costs due to an increase in output. The curves of average and marginal costs over time are related to each other similarly to the short-run period. The main strategy in the long run is the same - it is to determine the volume of production by means of the equality MC = MR.

Production costs - the cost of purchasing economic resources consumed in the process of producing certain goods.

Any production of goods and services, as you know, is associated with the use of labor, capital and natural resources, which are factors of production, the cost of which is determined by the cost of production.

Due to limited resources, the problem arises of the best use of all the rejected alternatives.

Opportunity cost is the cost of producing goods, determined by the value of the best missed opportunity to use production resources, providing the maximum profit. The opportunity cost of an enterprise is called economic cost. These costs must be distinguished from accounting costs.

Accounting costs differ from economic costs in that they do not include the value of factors of production that are owned by the owners of firms. Accounting costs are less than economic costs by the amount of the implicit earnings of the entrepreneur, his wife, implicit land rent and an implicit interest on the owner's equity. In other words, accounting costs are equal to economic costs minus all implicit costs.

Variants of the classification of production costs are diverse. Let's start by distinguishing between explicit and implicit costs.

Explicit costs are opportunity costs that take the form of monetary payments to the owners of production resources and semi-finished products. They are determined by the sum of the costs of the company to pay for the purchased resources (raw materials, materials, fuel, work force etc.).

Implicit (implicit) costs are the opportunity costs of using resources owned by the firm and take the form of lost income from the use of resources owned by the firm. They are determined by the value of the resources owned by the given firm.

The classification of production costs can be carried out taking into account the mobility of production factors. Fixed, variable and general costs are highlighted.

Fixed costs (FC) - costs, the value of which in a short period does not change depending on the change in the volume of production. They are sometimes referred to as "overhead" or "deadweight". Fixed costs include maintenance costs industrial buildings, purchase of equipment, rent payments, interest payments on debts, salaries of management personnel, etc. All these expenses should be financed even when the firm does not produce anything.

Variable costs (VC) - costs, the value of which changes depending on the change in the volume of production. If products are not produced, then they are equal to zero. Variable costs include purchase costs raw materials, fuel, energy, transport services, wages workers and employees, etc. In supermarkets, payment for the services of employees-controllers is included in variable costs, since managers can adjust the volume of these services to the number of buyers.

Total costs (TS) - the total costs of the firm, equal to the sum of its fixed and variable costs, are determined by the formula:

Overall costs increase as production increases.

Costs per unit of goods produced are in the form of average fixed costs, average variable costs and average total costs.

Average fixed cost (AFC) is the total fixed cost per unit of output. They are determined by dividing fixed costs (FC) by the corresponding quantity (volume) of products produced:

Since the total fixed costs do not change, when dividing them by the increasing volume of production, the average fixed costs will fall as the amount of output increases, because a fixed amount of costs is distributed over more and more large quantity units of production. Conversely, with a decrease in production, average fixed costs will rise.

Average Variable Cost (AVC) is the total variable cost per unit of output. They are determined by dividing variable costs by the corresponding amount of output:

Average variable costs first fall, reaching their minimum, then begin to rise.

Average (total) costs (ATS) are the total production costs per unit of output. They are defined in two ways:

a) by dividing the sum of total costs by the amount of products produced:

b) by summing the average fixed costs and average variable costs:

ATC = AFC + AVC.

Initially, the average (total) costs are high, since a small volume of production is produced and the fixed costs are high. As the volume of production increases, average (total) costs decrease and reach a minimum, and then begin to rise.

Marginal cost (MC) is the cost associated with the release of an additional unit of output.

Marginal costs are equal to the change in total costs divided by the change in the volume of products produced, that is, they reflect the change in costs depending on the quantity of products produced. Since fixed costs do not change, then constant marginal costs are always zero, ie MFC = 0. Therefore, marginal costs are always marginal variable costs, ie MVC = MC. It follows that increasing returns on variable factors reduce marginal costs, while falling returns, on the contrary, increase them.

Marginal costs show what is the amount of costs that the firm will incur in the growth of production for the last unit of output, or those funds that it will save in the event of a decrease in production for this unit. When the incremental cost of producing each additional unit of output is less than the average cost of the units already produced, producing that next unit will lower the average total cost. If the cost of the next additional unit is higher than the average cost, its production will increase the average total cost. The above applies to a short period.

In the practice of Russian enterprises and in statistics, the concept of "prime cost" is used, which is understood as the monetary expression of the current costs of production and sales of products. The structure of costs included in the prime cost includes the cost of materials, overheads, wages, depreciation, etc. There are the following types of prime cost: base - the prime cost of the previous period; individual - the amount of costs for the manufacture of a specific type of product; transportation - the cost of transportation of goods (products); sold products, current - assessment of sold products at the restored cost; technological - the amount of costs for organizing the technological process of manufacturing products and rendering services; actual - based on the data of actual costs for all cost items for a given period.

G.C. Bechkanov, G.P. Bechkanova

In practice, the concept of production costs is usually used. This is due to the difference between economic and accounting sense of costs. Indeed, for an accountant, costs are actually spent amounts of money, costs, documented, i.e. expenses.

Cost, as an economic term, includes both the amount of money actually spent and the loss of profits. By investing money in any investment project, the investor loses the right to use it in any other way, for example, to invest in a bank and receive a small, but stable and guaranteed, if, of course, the bank does not go bankrupt, interest.

The best use of available resources is called economic theory opportunity cost or opportunity cost. It is this concept that distinguishes the term "costs" from the term "costs". In other words, costs are costs less the opportunity cost. Now it becomes obvious why in modern practice it is the costs that form the cost and are used for the purposes of determining taxation. After all, the opportunity cost is a rather subjective category and cannot reduce taxable profit. Therefore, the accountant deals precisely with costs.

However, for economic analysis, opportunity costs are of fundamental importance. It is necessary to determine the lost profit, but "is it worth the candle?" It is on the basis of the concept of opportunity costs that a person who is able to create his own business and work “for himself” may prefer a less complex and nervous look activities. It is on the basis of the concept of opportunity cost that one can make a conclusion about the expediency or inexpediency of making certain decisions. It is not by chance that when determining the manufacturer, contractor and subcontractor, a decision is often made to announce an open tender, and when evaluating investment projects in conditions when there are several projects, and some of them must be postponed for a certain time, the lost profit coefficient is calculated.

Fixed and variable costs

All costs, minus alternative costs, are classified according to the criterion of dependence or independence from the volume of production.

Fixed costs - costs that do not depend on the volume of production. They are designated FC.

Fixed costs include expenses for the payment of technical personnel, security of premises, advertising of products, heating, etc. The fixed costs also include depreciation charges (for the restoration of fixed capital). To define the concept of depreciation, it is necessary to classify the assets of the enterprise into fixed and working capital.

Fixed capital is capital that transfers its value to finished products in parts (the cost of the product includes only a small fraction of the cost of the equipment with which the production is carried out of this product), and the value of the means of labor is called fixed assets. The concept of fixed assets is broader, since they also include non-productive assets that may be on the balance sheet of an enterprise, but their value is gradually lost (for example, a stadium).

The capital that transfers its value to the finished product during one turnover, spent on the purchase of raw materials and materials for each production cycle, is called circulating. Depreciation is the process of transferring the value of fixed assets to finished goods in parts. In other words, the equipment sooner or later wears out or becomes obsolete. Accordingly, it loses its usefulness. This happens due to natural causes(use, temperature fluctuations, structural wear, etc.).

Depreciation deductions are made on a monthly basis based on the depreciation rates established by law and the book value of fixed assets. Depreciation rate - the ratio of the amount of annual depreciation charges to the cost of the main production assets expressed as a percentage. The state sets various depreciation rates for individual groups basic production assets.

The following methods of depreciation are distinguished:

Linear (equal deductions over the entire service life of the depreciable property);

Diminishing balance method (depreciation is calculated from the entire amount only in the first year of equipment service, then the accrual is made only from the not transferred (remaining) part of the cost);

Cumulative, by the sum of the numbers of years useful use(a cumulative number is determined that represents the sum of the number of years of useful use of the equipment, for example, if the equipment is depreciated over 6 years, then the cumulative number is 6 + 5 + 4 + 3 + 2 + 1 = 21; then the price of the equipment is multiplied by the number of years of useful use and the resulting product is divided by the cumulative number, in our example, for the first year, depreciation deductions at the cost of equipment 100,000 rubles will be calculated as 100,000x6 / 21, depreciation deductions for the third year will be 100,000x4 / 21, respectively);

Proportional, in proportion to the output (depreciation is determined per unit of output, which is then multiplied by the volume of production).

In the context of the rapid development of new technologies, the state can apply accelerated depreciation, which allows more frequent replacement of equipment at enterprises. In addition, accelerated depreciation can be carried out within the framework of state support for small businesses (depreciation deductions are not subject to income tax).

Variable costs are costs that directly depend on the volume of production. They are designated VC. Variable costs include the cost of raw materials and materials, piecework wages of workers (it is calculated based on the volume of products produced by the employee), part of the cost of electricity (since electricity consumption depends on the intensity of the equipment operation) and other costs depending on the volume of products.

The sum of fixed and variable costs is gross costs. They are sometimes referred to as complete or generic. They are designated TS. It is not hard to imagine their dynamics. It is enough to raise the curve of variable costs by the amount of constant ones, which is shown in Fig. 1.

Rice. 1. Production costs.

The ordinate shows fixed, variable and gross costs, and the abscissa shows the volume of output.

When analyzing gross costs, it is necessary to draw Special attention on their structure and its change. Comparing gross costs with gross income is called gross performance analysis. However, for a more detailed analysis, it is necessary to determine the relationship between costs and the volume of output. For this, the concept of average costs is introduced.

Average costs and their dynamics

Average costs are the costs of producing and selling a unit of output.

Average total costs (average gross costs, sometimes referred to simply as average costs) are determined by dividing total costs by the quantity of products produced. They are designated ATC or simply AS.

Average variable costs are determined by dividing variable costs by the quantity of products produced.

They are designated AVC.

Average fixed costs are determined by dividing fixed costs by the quantity of products produced.

They are designated AFC.

It is only natural that average total costs are the sum of average variable and average fixed costs.

Average costs are high in the beginning, since starting a new production requires certain fixed costs, which are high per unit of output at the initial stage.

Average costs are gradually decreasing. This is due to the growth in output. Accordingly, with an increase in the volume of production per unit of output, less and less fixed costs are accounted for. In addition, the increase in production allows the purchase of necessary materials and instruments in large quantities, which, as you know, are much cheaper.

However, after a while, variable costs begin to rise. This is due to the diminishing marginal productivity of factors of production. The growth of variable costs causes the beginning of an increase in average costs.

However, the minimum average cost does not mean the maximum profit. At the same time, the analysis of the dynamics of average costs is of fundamental importance. It allows you to:

Determine the volume of production corresponding to the minimum cost per unit of production;

Compare the cost per unit of output with the unit price in the consumer market.

In fig. 2 shows a variant of the so-called marginal firm: the price line touches the average cost curve at point B.

Rice. 2. Point of zero profit (B).

The point where the price line touches the average cost curve is commonly referred to as the zero profit point. The firm is able to cover the minimum costs per unit of production, but the opportunities for the development of the enterprise are extremely limited. From the point of view of economic theory, the firm does not care whether to stay in the industry or leave it. This is due to the fact that at this point the owner of the enterprise receives normal remuneration for the use of his own resources. From the point of view of economic theory, the normal profit, considered as the return on capital at the best alternative option its use is part of the cost. Therefore, the average cost curve also includes opportunity costs (it is easy to guess that in conditions of pure competition in the long run, entrepreneurs receive only the so-called normal profit, and there is no economic profit). The analysis of average costs needs to be complemented by a study of marginal costs.

The concept of marginal cost and marginal revenue

Average costs characterize unit costs, gross costs - costs in general, and marginal costs make it possible to study the dynamics of gross costs, try to foresee negative trends in the future and ultimately draw a conclusion about the most the best option production program.

Marginal cost is the additional cost incurred in producing an additional unit of output. In other words, marginal cost is the increase in gross costs for an increase in production by one unit. Mathematically, we can define marginal costs as follows:

MC = ΔTC / ΔQ.

Marginal cost indicates whether the output of an additional unit of output is profitable or not. Consider the dynamics of marginal costs.

Initially, marginal costs are reduced, remaining below average. This is due to lower unit costs due to positive economies of scale. Then, like average, marginal costs start to rise.

It is obvious that the production of an additional unit of output also gives an increase in total income. To determine the increase in income due to an increase in production, the concept of marginal revenue or marginal revenue is used.

Marginal income (MR) - additional income received with an increase in production by one unit:

MR = ΔR / ΔQ,

where ΔR is the change in the income of the enterprise.

Subtracting the marginal cost from the marginal income, we get the marginal profit (it can be negative). Obviously, the entrepreneur will increase the volume of production as long as he retains the opportunity to receive marginal profit, despite its decrease due to the law of diminishing returns.

Source - M.N. Golikov Microeconomics: teaching aid for universities. - Pskov: PSPU Publishing House, 2005, 104 p.

Page 21 of 37

Classification of the costs of the firm in the short run.

When analyzing costs, it is necessary to distinguish between the costs of the entire output, i.e. total (total, total) production costs, and unit production costs, i.e. average (unit) costs.

Considering the costs of the entire output, one can find that when the volume of production changes, the value of some types of costs does not change, while the value of other types of costs is variable.

Fixed costs(FC – fixed costs) Are costs that do not depend on the volume of production. These include the costs of maintaining buildings, overhaul, administrative and management expenses, rent, property insurance payments, some types of taxes.

The concept of fixed costs can be illustrated in Fig. 5.1. Let us postpone on the abscissa the number of products (Q), and on the ordinate - costs (WITH)... Then the fixed cost graph (FC) will be a straight line parallel to the abscissa axis. Even when the enterprise does not produce anything, the amount of these costs is not zero.

Rice. 5.1. Fixed costs

Variable costs(VC – variable costs) - these are costs, the value of which changes depending on changes in production volumes. Variable costs include the cost of raw materials, materials, electricity, wages for workers, the cost of auxiliary materials.

Variable costs increase or decrease in proportion to output (Figure 5.2). On initial stages production

Rice. 5.2. Variable costs

industry, they grow at a faster rate than the output produced, but as the optimal output is achieved (at the point Q 1) the growth rate of variable costs decreases. At larger firms, unit costs per unit of output are lower due to an increase in production efficiency provided by more high level specialization of workers and more complete use of capital equipment, so the growth of variable costs is already slower than the increase in production. Later, when the enterprise exceeds its optimal size, the law of diminishing productivity (profitability) comes into effect and variable costs again begin to overtake the growth of production.

The law of diminishing marginal productivity (profitability) states that, starting from a certain point in time, each additional unit of a variable factor of production brings a smaller increment in the total volume of production than the previous one. This law takes place when any factor of production remains unchanged, for example, production technology or the size of a production area, and is valid only for a short period of time, and not over a long period of human existence.

Let us explain the operation of the law with an example. Suppose that the enterprise has a fixed amount of equipment and workers work in one shift. If the employer hires additional workers, then the work can be carried out in two shifts, which will lead to increased productivity and profitability. If the number of workers increases further, and workers begin to work in three shifts, then productivity and profitability will increase again. But if you continue to hire workers, then there will be no productivity gain. Such a constant factor as equipment has already exhausted its capabilities. The application of additional variable resources (labor) to it will no longer give the previous effect, on the contrary, starting from this moment, the costs per unit of production will grow.

The law of diminishing marginal productivity underlies the profit-maximizing behavior of a producer and determines the nature of the supply versus price function (supply curve).

It is important for an entrepreneur to know to what extent he can increase the volume of production so that variable costs do not become very high and do not exceed the amount of profit. The distinction between fixed and variable costs is significant. The producer can control variable costs by changing the volume of output. Fixed costs must be paid regardless of the volume of production and are therefore outside the control of the administration.

Total costs(TS– total costs) Is a set of fixed and variable costs of the firm:

TC= FC + VC.

Total costs are obtained by summing the constant and variable cost curves. They follow the curve configuration VC, but are spaced from the origin by the value FC(fig. 5.3).

Rice. 5.3. Total costs

Average costs are of particular interest for economic analysis.

Average costs Is the cost per unit of production. The role of average costs in economic analysis is determined by the fact that, as a rule, the price of a good (service) is set per unit of production (per piece, kilogram, meter, etc.). Comparison of average costs with the price allows you to determine the amount of profit (or loss) per unit of product and to decide on the feasibility of further production. Profit serves as a criterion for choosing the right strategy and tactics for the firm.

There are the following types of average costs:

Average fixed costs ( АFC - average fixed costs) - fixed costs per unit of production:

AFC= FC / Q.

As the volume of production increases, fixed costs are spread over more and more products, so that the average fixed costs decrease (Figure 5.4);

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

AVC= VC/ Q.

As the volume of production increases AVC first they fall, due to the increasing marginal productivity (profitability) they reach their minimum, and then, under the influence of the law of diminishing productivity, they begin to grow. So the curve AVC has an arched shape (see Fig. 5.4);

average total costs ( ATC – average total costs) - total costs per unit of production:

ATC= TS/ Q.

Average costs can also be obtained by adding the average fixed and average variable costs:

ATC= AFC+ AVC.

The dynamics of the average total costs reflects the dynamics of the average fixed and average variable costs. While both those and others are declining, the average total costs are falling, but when, as the volume of production increases, the growth of variable costs begins to outstrip the fall in constant costs, the average total costs begin to rise. Graphically, average costs are depicted by summing the curves of average fixed and average variable costs and have U-shape(see figure 5.4).

Rice. 5.4. Production costs per unit of production:

MS - limit, AFC - average constants, AVC - average variables,

ATC - average total production costs

The concepts of total and average costs are often insufficient for analyzing the behavior of a firm. Therefore, economists use another type of cost - marginal.

Marginal cost(MC – marginal costs) Is the cost associated with the production of an additional unit of output.

The category of marginal costs is of strategic importance, since it allows you to show the costs that the firm will have to incur in the case of producing another unit of output or
save in case of production reduction for this unit. In other words, marginal cost is a quantity that a firm can control directly.

The marginal costs are obtained as the difference between the total production costs ( n+ 1) units and production costs n product units:

MC= TSn + 1 – TSn or MC= D TS/ D Q,

where D is a small change in something,

TS- general costs;

Q- volume of production.

The marginal cost is graphically presented in Figure 5.4.

Let us comment on the main relationships between average and marginal costs.

1. Marginal costs ( MC) do not depend on fixed costs ( FС), since the latter do not depend on the volume of production, and MC Are incremental costs.

2. While the marginal costs are less than the average ( MC< AS), the average cost curve has a negative slope. This means that producing an additional unit of output reduces average costs.

3. When the marginal costs are equal to the average ( MC = AS), this means that average costs have ceased to decrease, but have not yet begun to grow. This is the point of minimum average costs ( AS= min).

4. When marginal costs become larger than average ( MC> AS), the curve of average costs goes up, which indicates an increase in average costs as a result of the production of an additional unit of output.

5. Curve MC crosses the curve of average variable costs ( AVC) and average costs ( AS) at the points of their minimum values.

To calculate costs and assess the production activities of an enterprise in the West and in Russia, they use different methods... In our economy, methods based on the category cost, including the total costs of production and sales of products. To calculate the cost, the costs are classified into direct costs that go directly to the creation of a unit of goods, and indirect costs that are necessary for the functioning of the company as a whole.

Based on the previously introduced concepts of costs, or costs, it is possible to introduce the concept added value, which is obtained by subtracting variable costs from the total income or revenue of the enterprise. In other words, it consists of fixed costs and net income. This indicator is important for assessing production efficiency.