Transcript
Cost behavior
Cost analysis
Types of costs:- Behavior of cost in the short run Behavior of cost in the long run Economies of scale Vs Economies
of scope
Costs in the Short run Fixed costs and variable costs
Total costs total fixed cost (TFC)
total variable cost (TVC)
total cost (TC = TFC + TVC)
fig
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Output(Q)
01234567
TFC(£)
1212121212121212
Total costs for firm XTotal costs for firm X
fig
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TFC
Output(Q)
01234567
TFC(£)
1212121212121212
Total costs for firm XTotal costs for firm X
fig
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TFC
Total costs for firm XTotal costs for firm X
Output(Q)
01234567
TFC(£)
1212121212121212
TVC(£)
010162128406091
fig
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0 1 2 3 4 5 6 7 8
TVC
Output(Q)
01234567
TFC(£)
1212121212121212
TVC(£)
010162128406091
TFC
Total costs for firm XTotal costs for firm X
fig
0
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40
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0 1 2 3 4 5 6 7 8
TVC
TFC
Total costs for firm XTotal costs for firm X
Output(Q)
01234567
TFC(£)
1212121212121212
TVC(£)
010162128406091
TC(£)
12222833405272
103
fig
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TCOutput
(Q)
01234567
TFC(£)
1212121212121212
TVC(£)
010162128406091
TC(£)
12222833405272
103
TVC
TFC
Total costs for firm XTotal costs for firm X
fig
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0 1 2 3 4 5 6 7 8
TC
TVC
TFC
Total costs for firm XTotal costs for firm X
Costs start increasing at an increasing rate here
Costs in the Short run
Average cost
average fixed cost (AFC)
average variable cost (AVC)
average (total) cost (AC)
Relationship between average and marginal cost
figOutput (Q)
Co
sts
(£)
MC
x
Average and marginal costs
figOutput (Q)
Co
sts
(£)
MC
x
Average and marginal costsAverage and marginal costs
Diminishing marginalreturns set in here
figOutput (Q)
Co
sts
(£)
AFC
AVC
MC
x
AC
z
y
Average and marginal costs
Marginal Costs
MC depends only on variable costs Shows cost impact of change in
production – fixed costs have no relevance to cost consequence of output change.
Marginal Costs
MC is change in total cost as result of one unit change in output, TC(N) - TC(N-1)
Rate of change of total cost with respect to output:
MC=TC/N FC/N + VC(N)/N
VC(N)/N
What is the relationship between average and marginal costs?
If MC < AC, then AC is falling
If MC > AC, then AC is rising
If MC = AC, then AC is constant
COST BEHAVIOR
LONG RUN COSTS
fig
Deriving long-run average cost curves: factories of fixed sizeDeriving long-run average cost curves: factories of fixed size
SRAC3
Co
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OutputO
SRAC4
SRAC5
5 factories
4 factories3 factories2 factories
1 factory
SRAC1 SRAC2
fig
SRAC1
SRAC3
SRAC2 SRAC4
SRAC5
LRAC
Co
sts
OutputO
Deriving long-run average cost curves: factories of fixed sizeDeriving long-run average cost curves: factories of fixed size
fig
Deriving a long-run average cost curve: choice of factory sizeDeriving a long-run average cost curve: choice of factory size
Co
sts
OutputO
Examples of short-runaverage cost curves
fig
LRAC
Co
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OutputO
Deriving a long-run average cost curve: choice of factory sizeDeriving a long-run average cost curve: choice of factory size
Economies of Scale
The advantages of large scale production that result in lower unit (average) costs (cost per unit)
AC = TC / Q Economies of scale – spreads total
costs over a greater range of output
Economies of Scale (internal)
Internal – Advantages that arise as a result of the growth of the firm Technical Commercial Financial Managerial Risk Bearing
Economies of Scale Internal: Technical
Specialisation – large organisations can employ specialised labour
Indivisibility of plant – machines can’t be broken down to do smaller jobs!
Increased dimensions – bigger containers can reduce average cost
Economies of Scale
Indivisibility of Plant: Not viable to produce products
like oil, chemicals on small scale – need large amounts of capital
Agriculture – machinery appropriate for large scale work – combines, etc.
Economies of Scale
Commercial
Large firms can negotiate favourable prices as a result of buying in bulk
Economies of Scale Financial
Large firms able to negotiate cheaper finance deals
Large firms able to be more flexible about finance – share options, rights issues, etc.
Economies of Scale
Managerial
Use of specialists – accountants, marketing, lawyers, production, human resources, etc.
Economies of Scale
Risk Bearing Markets across regions/countries Product ranges R&D
Economies of Scale (external) External economies of scale :– The advantages firms can gain as a
result of the growth of the industry – normally associated with a particular area
Supply of skilled labour Local knowledge and skills Infrastructure Training facilities
Diseconomies of Scale The disadvantages of large scale
production that can lead to increasing average costs Problems of management Maintaining effective communication Co-ordinating activities – often across
the globe! De-motivation and alienation of staff Divorce of ownership and control
More concepts :-
Stigler’s survivorship technique Economies of scope:-
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