Production costs in the short run. Types of costs in the short term
CLASSIFICATION OF COSTS can be carried out taking into account mobility production factors. Based on this approach, a distinction is made between fixed, variable and total (total) costs.
In the short term, some costs cannot be changed, so the enterprise increases output by using fixed and variable production resources.
Fixed costs (FC)- any costs in the short term that do not change with the level of production. For example, at the end of October and beginning of November 2002, AvtoVAZ did not work in Russia due to excess production of cars, but the plant continued to incur fixed costs, i.e. it was obliged to pay interest on loans, insurance premiums, property taxes, calculate wages for cleaners and watchmen, make utility payments.
Despite the lack of connection between production volumes and fixed costs, the influence of the latter on production does not cease, since they predetermine the technical and technological level of production.
Fixed costs include:
a) expenses for the maintenance of industrial buildings, machinery, equipment;
b) rent payments;
c) insurance premiums;
d) salaries for senior management personnel and future specialists of the enterprise.
All these expenses must be financed even when the enterprise does not produce anything.
The distinction between costs into fixed and variable is the starting point for distinguishing short-term and long-term periods. For the long run, all costs are variable because, for example, equipment can be replaced or a new plant can be acquired. The specified periods may not be the same for all industries. Thus, in light industry it is possible to increase production capacity within a few days, while in heavy industry it may take several years.
Variable costs (VC)– costs, the value of which varies depending on changes in the volume of output. If no product is produced, then variable costs are zero.
Variable costs include:
a) costs of raw materials, materials, fuel, energy, transport services;
b) costs of wages to workers and employees, etc.
In supermarkets, payment for the services of supervisors is included in variable costs, since managers can adjust the volume of these services to the number of customers.
At the beginning of production growth, variable costs increase at a slowing pace for some time, then they begin to increase at an increasing rate per each subsequent unit of output. Western economists explain this situation by the action of the so-called law of diminishing returns. Variable costs are manageable. An entrepreneur, in order to determine how much production should be produced, must know how much variable costs will increase along with the planned increase in production volume.
Gross (total, total) costs (TC) the sum of fixed and variable costs incurred by an enterprise for the production of goods. In the short run, gross costs depend on the volume of output. Gross costs are determined by the formula:
Gross costs increase as production volume increases.
Costs per unit of goods produced take the form of average fixed costs, average variable costs and average gross (total, total costs).
Average fixed costs (AFC) This 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 total fixed costs do not change, when divided by increasing production volume, average fixed costs will fall as the quantity of output increases, because a fixed amount of costs is distributed over more and more units of output. Conversely, as production volume decreases, average fixed costs will increase.
Average Variable Cost (AVC) This is the total variable cost per unit of output. They are determined by dividing variable costs by the corresponding quantity (volume) of products produced:
Average variable costs first fall, reaching their minimum, then begin to rise.
Average (total) costs (ATC) is the total cost of production per unit of output. They are defined in two ways:
a) by dividing the sum of total costs by the number of products produced;
b) by summing average fixed costs and average variable costs:
ATC = AFC + AVC.
At the beginning, average (total) costs are high because the volume of output is small and fixed costs are high. As production volume increases, average (total) costs decrease and reach a minimum, and then begin to rise.
Marginal cost (MC) are the costs associated with producing an additional unit of output.
Marginal costs are equal to the change in total costs divided by the change in volume produced, that is, they reflect the change in costs depending on the quantity of output. Since fixed costs do not change, fixed marginal costs are always zero, i.e. MFC = 0. Therefore, marginal costs are always marginal variable costs, i.e. MVC = MC. It follows from this that increasing returns to variable factors reduce marginal costs, while decreasing returns, on the contrary, increase them.
Marginal costs show the amount of costs that a firm will incur when increasing production by the last unit of output, or the amount of money that it will save if production decreases by a given unit. When the additional 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 average cost, its production will increase average total cost. The above applies to a short period.
The cost classification given in the previous section is only one of the possible ways to determine costs. It is also necessary to study the dependence of costs on the time factor and on the volume of output. There are three time periods: instantaneous, short-term and long-term. In the instantaneous period, all factors of production are stable, and all types of costs remain constant. In the short term, only some types of costs cannot change, but in the long term, all costs are variable.
In the short term, fixed, variable, and average and marginal costs are distinguished.
Fixed costs (FC) are costs that do not depend on the volume of products produced (from the English. fixed– fixed). These primarily include rental of buildings, equipment, depreciation charges, salaries of managers and management personnel.
Variable costs (V.C.) are costs, the value of which depends on the volume of products produced (from the English. variable– variable). These include the costs of raw materials, electricity, auxiliary materials, wages of workers and managers directly involved in production.
General costs(TS) is the sum of fixed and variable costs:
In Fig. 5.1 shows the company's costs in the short term. Type of variable cost curve V.C. due to the law of diminishing returns. Initially, variable costs increase quite quickly as production of the product increases (from 0 to point A), then the growth rate of variable costs slows down, as certain economies of scale occur (from the point A to point IN). After the point IN The law of diminishing returns applies and the curve becomes steeper.
Rice. 5.1. The company's costs of producing products
However, the manufacturer is often interested in the value of average rather than total costs, since an increase in the former may hide a decrease in the latter. The average constants are distinguished ( A.F.C.), average variables ( AVC) and average total costs ( ATC).
Average fixed costs represent fixed costs per unit of production (from the English. average fixed– average constant):
As output increases, average fixed costs decrease, so their graph is a hyperbola. When a small number of units are produced, they bear the brunt of fixed costs. As production volume increases, average fixed costs decrease and their value tends to zero.
Average Variable Costs represent variable costs per unit of production (from the English. average variable– average variable):
They change according to the law of diminishing returns, i.e. have a minimum point that corresponds to the most efficient use of variable resources.
Average total costs (ATS) is the total cost per unit of output (from the English. average total– average overall):
Since total costs are the sum of fixed and variable costs, the average cost is the sum of average fixed and average variables:
Accordingly, the nature of the curve ATC will be determined by the type of curves A.F.C. And AVC. The family of average cost curves is shown in Fig. 5.2.
Rice. 5.2. Family of average cost curves
The most important indicator for characterizing a company's activities is the marginal cost indicator. It reflects the dynamics of the company's costs as the volume of output changes.
Marginal cost (MS) are the costs associated with producing an additional unit of output:
where is the increment in total costs; – increase in production volume.
If the total cost function is differentiable, then marginal cost is the first derivative of the total cost function:
Since the value of total costs is determined as, then
Three conclusions can be drawn from this expression:
1. if AC increases, then d AC/ dQ> 0, which means MS > AC;
2. if AC decreases, then d AC/ dQ < 0, значит, MS< АС ;
3. at a minimum of average costs d AC/ dQ= 0, therefore, MS = AC.
Based on these considerations and based on the graph of the average total cost function (Fig. 5.2), we will construct a graph of the marginal cost function together with the graph of the average cost function (Fig. 5.3).
Rice. 5.3. Average and marginal cost schedule
The ascending branch of the marginal cost curve ( MS) intersects the curves of the average variables ( AVC) and average total ( ATS) costs at their minimum points A and B. With an increase in output, the difference between average total and average variable costs invariably decreases, and the curve AVC is getting closer to the curve ATC.
5.3. The firm's costs in the long run. Positive and
diseconomies of scale
As mentioned above, in the long run all costs become variable, since the firm can change the volume of all factors of production. She strives to choose the best
combination - one that minimizes costs for a given volume of output. The desire to increase output and at the same time reduce unit costs will push the entrepreneur to expand the scale of the company. As a result, an essentially new, larger enterprise with new production capabilities will be created. In large enterprises, over a long period of time, it becomes possible to use new technologies and significantly automate production. This leads to increased capital costs, but at the same time reduces the use of human labor.
In the long run, we will consider average total costs, the value of which is determined by the average costs for various production options.
Let's assume that the manufacturer increases output, that is, gradually increases the scale of the company and can change the methods of production. In Fig. Figure 5.4 shows the short-run average total costs for different production options. The output at which average total costs are minimal is denoted for the first option by Q 1, for the second through Q 2, and for the third through Q 3. If the firm produces a quantity of output up to , then the first production option should be chosen, since the minimum average cost will be on the curve ATC 1. Transition to the second production method with costs ATC 2 premature as this will only increase costs.
Rice. 5.4. Curve LATC, built on the basis of short-term curves
average costs
Releasing a product from volume to most economically produced at a cost that fits the curve ATC 2, and from the volume go to the curve ATC 3.
Thus, the long-run average cost curve LATC bends around all three short-term curves ATC and shows the minimum production costs with increasing product output.
As can be seen from Fig. 5.4, long-run average total cost curve LATC also has U-shaped like the short-run average cost curve, but this is due to different reasons. The downward portion of the curve showing a decrease in average total costs LATC with increasing production volume, corresponds to increasing returns to scale of production, and the ascending portion of this curve, showing an increase in average costs with increasing production volume, corresponds to diminishing returns to scale.
Some industries are characterized by constant returns to scale. Constant returns to scale occur when the quantity LATC does not depend on the volume of output (Fig. 5.5).
Rice. 5.5. Graph of short-run and long-run average total costs with constant returns to scale
Experience shows that with small production volumes there are increasing returns to scale, with medium volumes there are constant returns, and with large volumes there are diminishing returns. However, it should be noted that in some industries (metallurgy, chemistry and others) large enterprises have an advantage over medium and small ones, and they experience economies of scale, that is, increasing returns to scale. Their main advantages are:
· division of labor, intra-company specialization and cooperation;
· more efficient use of capital;
· possibility of producing by-products;
· availability of discounts on purchases;
· savings in transportation costs.
The list of circumstances that determine the presence of increasing economies of scale can be expanded. However, one way or another, as the enterprise enlarges, sooner or later opposing factors begin to operate:
· bottlenecks appear in the technological process;
· difficulties arise with the sale of large volumes of products;
· problems of completeness of information are increasing;
· the costs of maintaining an expanding administrative apparatus increase, etc.
The action of these factors determines the negative effect of scale, the main way to combat which is to artificially disaggregate the enterprise and provide its individual components with greater independence.
6. MARKET STRUCTURE. PERFECT AND
IMPERFECT COMPETITION
Currently, there are five models of market economies that are used in different countries: American, German, French, Swedish and Japanese. Each model includes different types of markets. The market should be understood as a mechanism of interaction between buyers and sellers, as a result of which an equilibrium market price is established.
The presence of competition is a necessary distinctive feature of market relations. The word “competition” came into the vocabulary of economists from everyday speech, and at first it was used very loosely, with an unsettled meaning. Depending on the methods of its implementation, perfect and imperfect competition are distinguished.
Production costs in the short term are divided into constant, variable, total, average and marginal.
Fixed costs (FC) ? costs that do not depend on production volume. They will always occur, even if the company does not produce anything. These include: rent, deductions for depreciation of buildings and equipment, insurance premiums, capital repair costs, payment of obligations on bond issues, as well as salaries to senior management personnel, etc. Fixed costs remain unchanged at all levels of production, including zero. Graphically they can be represented as a straight line parallel to the abscissa axis (see Fig. 15.1). It is indicated by the FC line.
Variable cost (VC) ? costs that depend on production volume. These include the costs of wages, raw materials, fuel, electricity, transportation services and similar resources. Unlike constants, variable costs vary in direct proportion to production volume. Graphically they are depicted as an ascending curve (see Fig. 15.1), indicated by the VC line.
The variable cost curve shows that as product output increases, variable production costs increase.
The difference between fixed and variable costs is essential for every businessman. An entrepreneur can manage variable costs, since their value changes over the short term as a result of changes in production volume. Fixed costs are beyond the control of the company's administration, since they are mandatory and must be paid regardless of the volume of production.
Rice. 15.1. Graph of fixed, variable and gross costs
General, or gross, costs (total cost, TC)? total costs for a given volume of production. They are equal to the sum of fixed and variable costs: TC? F.C.? V.C.
If we superimpose the curves of fixed and variable costs on top of each other, we get a new curve reflecting total costs (see Fig. 15.1). It is indicated by the TC line.
Average total cost (ATC, sometimes called AC)? is the cost per unit of output, i.e., total cost (TC) divided by the quantity produced (Q): ATC? TS/Q.
Average total costs are usually used for comparison with price, which is always quoted per unit. Such a comparison makes it possible to determine the amount of profit, which allows us to determine the tactics and strategy of the company in the near future and for the future. Graphically, the average total (gross) cost curve is depicted by the ATC curve (see Fig. 15.2).
The average cost curve is U-shaped. This suggests that average costs may or may not be equal to the market price. A firm is profitable or profitable if the market price is higher than average costs.
Rice. 15.2. Average cost curves
In economic analysis, in addition to average total costs, concepts such as average fixed and average variable costs are used. This is similar to average total cost, fixed cost, and variable cost per unit. They are calculated as follows: average fixed costs (AFC) are equal to the ratio of fixed costs (FC) to output (Q): AFC ? FC/Q. Average variables (AVC), by analogy, are equal to the ratio of variable costs (VC) to output (PO):
Average total cost? the sum of average fixed and variable costs, i.e.:
PBX? AFC + AVC, or PBX? (FC ? VC) / Q.
The value of average fixed costs continuously decreases as production volume increases, since a fixed amount of costs is distributed over more and more units of output. Average variable costs change according to the law of diminishing returns.
Marginal costs play an important role in determining a firm's strategy in economic analysis.
Marginal, or marginal, costs (marginal cost, MC)? costs associated with producing an additional unit of output.
MC can be determined for each additional unit of production by dividing the change in the increase in the sum of total costs by the increase in output, i.e.:
MS? ?TS/?Q.
Marginal costs (MC) are equal to the increase in variable costs (?VC) (raw materials, labor), if it is assumed that fixed costs (FC) are constant. Therefore, marginal cost is a function of variable cost. In this case:
Thus, marginal cost (sometimes called incremental cost) represents the increase in costs resulting from producing one additional unit of output.
Marginal cost shows how much it would cost the firm to increase output by one unit. Graphically, the marginal cost curve is an ascending line MC, intersecting at point B with the average total cost curve ATC and point B with the average variable cost curve AVC (see Fig. 15.3). Comparison of average variable and marginal cost of production? important information for managing a company, determining the optimal size of production within which the company consistently receives income.
Rice. 15.3. Marginal cost curve (MC)
From Fig. 15.3 shows that the marginal cost (MC) curve depends on the value of average variable costs (AVC) and gross average costs (ATC). At the same time, it does not depend on average fixed costs (AFC), because fixed costs FC exist regardless of whether additional output is produced or not.
Variable and gross costs grow along with product output. The rate at which these costs increase depends on the nature of the production process and, in particular, on the extent to which production is subject to the law of diminishing returns in relation to variable factors. If labor is the only variable, what happens when output increases? To produce more, a firm must hire more workers. Then, if the marginal product of labor declines rapidly as labor input increases (due to the law of diminishing returns), more and more costs are needed to speed up output. As a result, variable and gross costs rise rapidly along with an increase in production volume. On the other hand, if the marginal product of labor decreases slightly as the quantity of labor used increases, costs will not increase as quickly as output increases. Marginal and average costs are important concepts. As we will see in the next chapter, they have a decisive impact on the firm's choice of production volume. Knowledge of short-term costs is especially important for firms operating in conditions of significant fluctuations in demand. If a firm is currently producing at a level at which marginal cost rises sharply, uncertainty about future increases in demand may force the firm to make changes to its production process and likely induce additional costs today to avoid higher costs tomorrow.
To self-check your acquired knowledge, complete training tasks from the set of objects for the current paragraph
Ministry of Education and Science of the Russian Federation
Federal Agency for Education
State Educational Institution of Higher Professional Education All-Russian Correspondence Financial and Economic Institute
Department of Economic Theory
Test
by discipline "Economic theory"
Option No. 15
Teacher - Smirnova K.N.
Student - Krokhina. E.V.
Faculty: Management and Marketing
Specialty: organization management
I year, 5th group, evening
Personal file number: 09MMD12535
Kaluga 2010
Introduction
2. Total, average and marginal costs
Conclusion
Introduction
Production costs are a rather serious and pressing problem today due to the fact that in market conditions the center of economic activity moves to the main link of the entire economy - the enterprise. It is at this level that products needed by society are created and necessary services are provided. Here the issues of economical use of resources, the use of high-performance equipment and technology are resolved. The enterprise strives to reduce production and sales costs to a minimum.
Since costs are the main limiter on profit and at the same time the main factor influencing the volume of supply, decision-making by the company’s management is impossible without an analysis of existing production costs and their value for the future. This applies both to the release of already mastered products and to the transition to new products. If the costs are not calculated, then there is a very high probability that they will be more than the income, i.e. the company will suffer reduced profits and even losses. And if a company falls into a financial crisis, it can be very difficult to get out of it. Any company, before starting production, must clearly understand what profit it can expect. To do this, she will study demand and determine at what price the products will be sold, and compare the expected revenues with the costs to be incurred.
1. Company costs in the short term
The costs of acquiring the production factors used are called production costs. Costs are the expenditure of resources in their physical, natural form, and costs are the valuation of the costs incurred.
All costs are divided into transformation and transaction.
Transformation costs - include the direct costs of a company (or enterprise) for processing raw materials into finished products intended for sale on the market.
Transaction costs are associated with protecting an entrepreneurial position in market transactions and are not associated with the process of value creation. They create goods that are valuable for an individual or a collective agent of the economy (enterprise, firm, association). These include the costs of finding the necessary business information, negotiating, concluding contracts, and protecting brand names and trademarks. It is also believed that a type of this kind of costs are losses from the so-called opportunistic behavior of counterparties, when they conduct the negotiation process with greater benefit for themselves.
There are two approaches to estimating costs: accounting and economic. Both accountants and economists agree that a firm's costs in any period are equal to the value of the resources used to produce the goods and services sold during that period. The company's financial statements record actual or external (“explicit”) costs, which represent cash costs to pay for the production resources used (raw materials, materials, labor, etc.). However, economists, in addition to explicit ones, also take into account internal “implicit” costs; they are also called costs of missed (lost) opportunities. “Opportunity costs” mean the costs and losses of income that arise when choosing one of the options for production or sales activities, which means abandoning other possible options. Thus, opportunity cost can be viewed as the amount of income that the factors of production could have provided the firm if they had been more profitably used in alternative options.
Accordingly, a distinction is made between accounting profit and net economic profit. As a rule, economic profit refers to the difference between total revenue and external and internal costs.
Short term- this period of time is too short to change production capacities, but sufficient to change the intensity of use of these capacities. Production capacity remains unchanged in the short term, and the volume of output can change by changing the amount of labor, raw materials, and other resources used at these facilities. The production costs of any product by a given firm depend not only on the prices of the necessary resources, but also on technology - on the amount of resources needed for production. It is this, that is, the technological aspect of cost formation, that interests us at the moment.
Over the short run, a firm can change its output by combining varying quantities of inputs with fixed capacities. How will output change as more and more variable resources are added to the firm's fixed resources? In the most general form, the answer to this question is given by the law diminishing productivity which reflects the relationship between an increase in production and the costs of a variable factor, with all other factors remaining constant. According to this law, the increase in production achieved with a uniform increase in the variable factor, upon reaching a certain level, will decrease as the ratio between the variable and constant factors increases.
You can find different names for the law of diminishing returns:
"law of diminishing marginal productivity", "law of diminishing marginal product", "law of diminishing returns". This is due to the fact that the law of diminishing returns reflects how the additional or marginal product changes as a variable factor increases while others remain constant. Sometimes the law of diminishing returns is also called the “law of varying proportions” or “law of varying proportions.” In this case, it is emphasized that the law of diminishing returns also reflects how production changes when the ratio between variable and constant factors in production changes
It is easy to see that the law of diminishing returns primarily reflects changes in the total, average and marginal products of variable costs.
In other words, if the number of workers servicing machinery increases, then output growth will occur more and more slowly as more workers are involved in production.
2. Total, average and marginal costs
In the short run, production costs can be divided into fixed and variable.
Fixed costs (F C ) – These are the monetary costs of resources that make up the constant factors of production. The amount of fixed costs does not depend on the volume of production; these include the costs of operating buildings, structures and equipment, administrative and management expenses, and rent. Fixed costs exist even when the firm does not produce anything, does not carry out any production. Therefore, fixed costs are sunk costs that create the basis for the company’s losses.
Variable costs (V C ) – these are the monetary costs of resources that make up the variable factors of production. Their value changes with changes in production volume; they usually include the costs of materials, raw materials, and wages.
General costs (TS ) - these are the total costs of producing a certain volume of products. Since in the short term a number of input factors of production (primarily capital) do not change, some part of the total costs also does not depend on the number of units of variable resource used and on the volume of output of goods and services. Consequently, for any production volume Q, total costs are the sum of total fixed and total variable costs:
Opportunity costs of full-time education include:
a) tuition fees;
b) the cost of textbooks;
c) the salary that could be received by working instead of studying;
d) all of the above options are correct.
The correct answer is c)
Thus, when studying at a full-time university after school, a girl misses the opportunity to work during this period as a secretary (and not as a loader or watchman) and receive an appropriate salary. The secretary's salary will be for her the alternative cost (opportunity costs) of studying full-time at a university.
The firm's fixed costs are:
a) costs of resources at prices in effect at the time of their acquisition;
b) minimum production costs of any volume of production under the most favorable production conditions;
c) the costs that the company bears even if the products are not produced;
d) implicit costs;
e) none of the answers are correct.
The correct answer is c)
Fixed costs include costs that a company has, regardless of the volume of products produced.
Ground rent will increase, other things being equal, if:
a) the price of land decreases;
b) demand for land is growing;
c) demand for land is decreasing;
d) the supply of land is growing;
d) under any of these conditions.
Explain your answer.
The price of land is related to land rent. Ground rent is a payment for the use of land and other natural resources, the supply of which is strictly limited.
Rent must be distinguished from ground rent. Rent is the price of land services. It includes rent, depreciation on buildings and structures, as well as interest on invested capital. If the owner of the land has made some improvements, then he must reimburse the cost of these structures and receive interest on the capital expended (after all, he could put the money in the bank and live in peace, receiving interest).
As demand increases, the price increases, and hence the rent.
In the long-term time interval, zero economic profit is obtained by:
a) firms operating under conditions of perfect competition
b) firms operating under conditions of monopolistic competition
c) firms operating in an oligopoly
d) firms operating under conditions of pure monopoly.
Operating under conditions of perfect competition brings zero profit in the long run. Since as soon as profit appears, new market participants appear who increase supply, reducing prices.
Calculate the costs from the table: total TC, constant FC, variable CS, marginal MC, average ATC, average constant AFC and average variable AVC.
|
Issue pcs. |
TFC |
TVC |
|||||
Formulas for solution:
MC = ∆TC /∆Q = ∆TVC /∆Q
ATC = TC/Q
AFC = TFC /Q
AVC = TVC /Q
Conclusion
The firm's costs in any period are equal to the cost of the resources used to produce the goods and services sold during that period. The profit of an enterprise depends on the price of the product and the cost of its production. The price of products on the market is a consequence of the interaction of supply and demand. Here, the price changes under the influence of the laws of market pricing, and costs can increase or decrease depending on the volume of labor or material resources consumed.
The specific composition of costs that can be attributed to production costs is regulated by law in almost all countries.
In enterprises, the cost structure is often understood as the relationship between fixed and variable costs, which allows one to analyze the structure and draw conclusions about the quality of production.
The most important ways to reduce production costs is to determine the optimal amount of purchased resources consumed in production - labor and material. As well as reducing the labor intensity of products and increasing productivity.
The basic proposition of modern economics about production costs: in order to obtain more of any good, it is necessary to provide potential producers and suppliers of this good with a certain incentive that would encourage them to transfer resources from the sphere of their current use to the production of what we want. It is necessary that the benefits of such a transfer exceed the costs of it, i.e. exceeded the value of the opportunities that potential entrepreneurs would have to give up.
List of used literature
1.Economic theory: key issues: Textbook/PEOD ed. Doctor of Economics, Professor A.I. Dobrynin. – 3rd ed., add. – M.: INFRA-M, 1999
2.Economic theory. Textbook. Ed. I.P. Nikolaeva. - M.: Finstatinform, 1997.
3. Economics of organizations (enterprises): Textbook for universities. Ed. prof. V.Ya. Gorfinkel, prof. V.A. Shvandira. - M.: UNITY-DANA, 2003
4. Kurakov L.P., Yakovlev G.E. course of economic theory: Textbook. 4th ed. – M. Helios ARV, 2005.
5. E. Popov, V. Lesnykh Transaction costs in a transition economy//World Economy and International Relations. - 2006.
Introduction
Lecture text
People need to make a profit
in proportion to your costs and risks.
David Hume
Not every company makes a profit from its activities. Moreover, in recent years in Russian newspapers one can often find advertisements like “Company liquidation services.” But why do some companies prosper and their employees receive high salaries, and their owners drive around in luxury cars, while others go bankrupt, and their owners are forced to spend money and effort on liquidating their companies?
One of the main conditions for a company’s activity is the availability of the necessary resources for the production of a particular product, and the main problem is the rational use of attracted resources.
The problem of the formation of production costs is inextricably linked with the problem of resource use.
The efficiency of an enterprise involves choosing a production program that would provide maximum income at minimum costs.
The entire set of costs associated with the use of resources to produce products is called production costs.
Before starting production, any company must clearly understand what profit it can expect, what costs it will have to incur and compare them.
Central to the analysis of the economic activities of any commercial enterprise is a detailed analysis of production costs at all stages of the production process and income in one form or another.
At the same time, in order to perform a detailed analysis of production costs, to detect those places in the production cycle where they are unreasonably large, it is necessary to deeply split the total costs into their component parts, to distinguish among them explicit and implicit, constant and variable, as well as marginal and average costs per unit products.
A detailed analysis of production costs and comparing them with total and marginal income allows us to determine the degree of profitability of the company and makes it possible to periodically adjust the production program based on the market situation.
This lecture is devoted to the study of these problems, during which issues such as the essence and classification of costs, the company’s choice of production volume based on the analysis of marginal and average costs, costs in the short and long term, economies of scale of production, analysis of the break-even of the company and its balance in production.
Study questions (main part):
1. Production costs: economic and accounting
Production costs in the most general form represent the costs of production factors.
The activities of a company make sense for its owners only if they receive income in the form of profit.
Profit- this is the excess of revenue from the sale of a product over the total costs (expenses) of resources for its production and organization of sale.
TOTAL COSTS– expenses for the acquisition of the entire volume of resources that the company used to organize the production of a certain volume of products.
When carrying out its activities, any company uses two types of resources:
External;
Internal.
External resources– this is everything that the company buys from other commercial organizations or citizens (materials, parts, energy, labor, etc.).
They are spent to produce a certain volume of products, and to produce the next batch they must be purchased again.
Respectively expenses that an enterprise incurs as a result of making payments for the external resources and services it needs are called external or obvious costs (payment for raw materials and materials, wages of employees, payment of interest on loans, rent, transportation costs and much more).
In general terms, we can say that these are the costs that are supported by payment documents and are recorded in the accounting books. Therefore, these costs are also called accounting costs.
Internal resources- this is everything that belongs to the company itself and is used by it to organize its activities (premises, equipment, land, funds of the company owner used to create the company, entrepreneurial abilities of the company owner).
Respectively internal (hidden or opportunity) costs include the costs of resources owned by the enterprise.
Internal costs are lost revenues from alternative uses of the firm's internal resources. The owner of capital assets and material resources always has the opportunity to use them alternatively. When deciding in favor of one option, he refuses the other and always loses something, loses income in some other form.
For example, an entrepreneur, investing money in production rather than in a bank, refuses to receive income in the form of interest. The building, which is owned by a company and used for its activities, could be rented to someone else and receive rent for it. This means that it is advisable to receive income from using the building for your own needs in an amount no less than the possible rent.
Therefore, all internal resources also have value for the company, and therefore the total value of its costs consists of:
External (explicit) costs;
Internal (implicit) costs.
The total costs understood in this way are called economic costs .
ECONOMIC COSTS– the total costs of a firm for the production of goods or services over a certain period of time, determined taking into account internal (implicit) costs.
The adjective “economic” in this definition is associated with the difference in views on costs between economists and accountants, as well as state tax services.
Neither accountants nor tax authorities take into account its internal (implicit) costs as part of a company's costs. For them, only those costs are real that were actually incurred and reflected in accounting documents, and therefore called accounting costs .
ACCOUNTING COSTS– the total amount of external (explicit) costs of a firm for the production of goods or services over a certain period of time.
This first approach to the classification of production costs.
Understanding costs will be incomplete if we do not pay attention to the fact that a firm's costs are formed differently depending on the type of resources used and the volume of production.
Let us compare, for example, the costs associated with the use of materials and the costs associated with the use of production facilities.
If materials during the manufacturing process lose their appearance, turning into finished products (and some into waste), then the production workshops remain in place even after the next batch of products leaves them, in addition, they do not change their size and their equipment.
Let's assume that they were built to produce 100 cars per day. But if in this workshop and on this equipment, due to falling demand, not 100, but, say, 90 cars are produced, then this will not change either the size of the workshop or the volume of equipment installed in it.
Differences in the scale of changes in production resources when production volumes change make it possible to break down all types of costs (expenses) ( WITH) by two categories:
1) fixed costs;
2) variable costs.
FIXED COSTS ( F.C.) - these are those costs that cannot be changed in the short term, and therefore they remain the same regardless of any changes in the volume of production of goods or services.
Permanent F.C. production costs do not depend on the volume of output Q and arise even when production has not yet begun. So, even before the start of production, the enterprise should have at its disposal such factors as buildings, machines, and equipment.
In the short term, fixed costs include, for example, rent for premises, security costs, real estate taxes, costs associated with equipment maintenance, payments to repay previously received loans, as well as all kinds of administrative and other overhead costs, etc.
VARIABLE COSTS ( VС) - these are those costs that can be changed in the short term, and therefore they change with any change in production volumes.
TOTAL COSTS( TS) represent the sum of fixed and variable costs, or the total costs of the company, for the acquisition of all factors of production and the organization of their functioning.
Total production costs
The relationship between production volume and the level of production costs is described using the corresponding curves (Fig. 1).
Figure 1. Structure of total costs and differences in changes in the amounts of fixed and variable costs when production volumes change
It is very important for a company to know the dynamics and average costs (AS) firm - the cost of producing one unit of output.
AVERAGE COSTS- the cost of producing a unit of product, obtained by dividing the total cost by the volume of manufactured products over a certain period of time.
Average total cost (total cost per unit
products);
Average variable costs (variable costs per unit of production)
Average fixed costs (fixed costs per unit of production)
To understand the nature of average and marginal costs, let's look at the graph (Fig. 2), the data used to construct it is given in table. 1., and first we’ll try to use it to analyze the change average costs .
Table 1. – Cost calculation
| Volume of production, units | Variable costs for the entire output volume, thousand rubles. | Fixed costs, thousand rubles. | Total costs for the entire output, thousand rubles. | Average variable costs per unit of production, thousand rubles. | Average fixed costs per unit of production, thousand rubles. | Average total costs per unit of production, thousand rubles. | Marginal costs per unit of production, thousand rubles. |
| Q | V.C. | F.C. | TC | AVC | A.F.C. | ATC | MS |
| 1,2 | 1,5 | 2,7 | |||||
| 0,8 | 0,75 | 1,55 | 0,4 | ||||
| 0,7 | 0,5 | 1,2 | 0,5 | ||||
| 0,9 | 0,4 | 1,3 | 1,5 |
Figure 2. Patterns of changes in average costs with increasing
scale of production and changes in average costs and profit from the sale of a unit of production with an increase in production volumes and a market price of 3.0 million rubles.
AFC - average fixed costs;
AVC - average variable costs;
ATC - average total costs
MC – marginal cost
Pmax - maximum profit from the sale of a unit of production;
P 40 - the amount of profit from the sale of a unit of production with a production volume of 40 units
Table data 1 and Fig. 1, 2 reflect several very important patterns changes in firm costs.
They consist in the fact that as production scales increase:
1) the amount (value) of fixed costs does not change, and the amount (value) of average fixed costs (fixed costs per unit of production) decreases;
2) the amount (value) of variable costs increases, and the amount (value) of average variable costs (variable costs per unit of production) first decreases and then increases;
3) the total amount (value) of all costs increases, and the amount (value) of average total costs (total costs per unit of production) first decreases and then increases.
Consequently, the larger the scale a company manufactures its products (or provides services), the cheaper on average each unit of goods initially costs it. Consequently, with a constant market price from each unit of goods, the company will initially receive increasing profits.
Reason This is due to the steady decline in average fixed costs with increasing scale of production.
By definition, the amount of these costs is constant (say, over the course of a month). This means that as production volume increases, fixed costs are distributed over a larger number of products, so that average fixed costs decrease as output volume increases.
Therefore, as can be clearly seen in Fig. 2, the curve of these costs A.F.C. falls lower and lower as production volume increases.
Because of this, an increase in the scale of production and the creation of increasingly larger production facilities (within certain boundaries) provide a significant reduction in both average fixed costs and average total costs.
This economic pattern is called effect of scale.
SCALE EFFECT-increase in the scale of annual production within certain limits, leading to a reduction in average production costs.
This allows you to either make more profit per unit of goods at constant prices, or reduce prices in order to gain a larger market share and get a larger amount of profit.
The possibility of reducing production costs while increasing its scale to an economically rational limit and the scientific and technological revolution led to gigantic development in the 20th century. serial and mass production of goods. And this not only transformed industry with the emergence of huge enterprises, but also made it possible to dramatically increase the level of well-being of citizens of industrialized countries.
But increasing the scale of production cannot be limitless and rational only up to certain limits. Failure to understand this by firm managers can lead to wrong decisions.
So, in Fig. 2 shows that when a certain limit is exceeded (in our example, an output volume of 30 units per month), average variable and total costs not only stop decreasing, but begin to increase. This means that even with a constant market price of a product beyond this border, an increase in production volumes results in a gradual decrease in the amount of profit from the sale of a unit of product and even its drop to zero.
This circumstance is illustrated in Fig. 2.
At a monthly output of 30 units, average total costs are lowest and profit per unit is highest (as indicated by the arrow labeled P tah).
But if the firm continues to increase its output during the month, then average costs will begin to increase (the average cost curve will begin to converge with the line indicating the market price level). Then the amount of profit from each unit of production will become less and less (arrow length P 40, showing the profit per unit of production with a production volume of 40 units per month, is significantly less than the arrows P tah).
The reason for such dynamics of average total costs is associated with the influence of changes in costs of another type. These costs are usually called marginal(from English margin- “border”), or extreme.
MARGINAL (MARGINAL) COSTS-the actual cost of producing each additional unit of output.
Marginal cost MC is the increase in total costs caused by the release of an additional unit of production:
where: ΔTC – increase in total costs;
ΔQ – increase in production volume;
Marginal cost can be represented as the difference between the cost of producing n units of output and the cost of producing n-1 units of output:
MC = TC n – TC n -1,
where: TC n is the total cost of producing the nth quantity of products;
TC n -1 – total costs of producing the n-1th quantity of products.
Since only variable costs increase with output growth (TC = VC), we can write:
where: – increase in variable costs;
– the increase in production caused by them.
Marginal costs, showing how much it will cost the firm to increase output per unit, have a decisive influence on the firm's choice of production volume, because this is precisely the indicator that the firm can influence.
As production volume increases, marginal cost first decreases and then begins to rise.
Example: If, with an increase in sales volume by 100 units. goods, the company's costs will increase by 800 rubles, then MC = 800/100 = 8 rubles. This means that an additional unit of goods costs the company an additional 8 rubles (this is the marginal cost).
You can put it this way: marginal costs are the costs associated with producing the last unit of output.
Here is an example of cost calculation. Let there be 10 units upon release. variable costs are 100, and at output 11 units. they reach 105. Fixed costs do not depend on output and are equal to 50. Then:
| Q | F.C. | V.C. | TC (FC+VC) | AFC (FC/Q) | AVC (VC/Q) | AC (TC/Q) | MC ( TC/ Q) |
| 4,55 | 9,55 | 14,1 |
In our example, output increased by 1 unit. (∆ Q = 1), while variable and total costs increased by 5 (∆ VC = ∆ TC = 5). Therefore, an additional unit of output required an increase in costs by 5. This is the marginal cost of producing the eleventh unit of output (MC = 5).
That. When analyzing a firm's market behavior, marginal costs play an important role.
The dynamics of costs in the short term can be traced on the graph of a family of curves (Fig. 3):
Figure 3. Dynamics of production costs in the short term
The position of the marginal cost (MC) curve is determined by the movement of variable costs (). Bye MC< AVC, AVC будут снижаться: как только MC>AVC, AVC will begin to grow.
Similar connection between MC and PBX: while MC Hence, the MC curve intersects the AVC and ATC curves at their minimum points.
The calculation of marginal costs is extremely important, since the entrepreneur must know with what increase in costs the desired increase in production will be associated. Their combination will ultimately give him a signal where it is necessary to stop the expansion of production. THAT. An increase in the scale of production always requires careful justification so that the marginal costs of producing an additional unit of goods do not become equal to the proceeds from its sale and the profit becomes zero. In this economic situation, the firm should stop increasing production of goods until it finds a way to either reduce the marginal cost of producing them or sell the goods at a higher price.
