Cost curve - Wikipedia
In economics, a cost curve is a graph of the costs of production as a function of total quantity However, whilst this is convenient for economic theory, it bears little relationship to the real world. A short-run marginal cost curve graphically represents the relation between marginal (i.e., incremental) cost incurred by a firm in. where Q represents the final output and X1 and X2 are inputs or factors of production. Relationship between Marginal Product and Total Product This gives the Total product curve a convex shape in the beginning as variable factor inputs. equals the difference between total revenue and total costs. . Remember that the short-run means that the amount of capital we have is limited; . shown in Graph 3, total output rises and falls when marginal product curve is positive and.
To produce and supply larger quantities, higher prices are needed. Three Product Curves Three Curves The law of diminishing marginal returns is reflected in the shapes and slopes of the total product, marginal product, and average product curves.
The most important of these being the negative slope of the marginal product curve. This graph presents the three product curves that form the foundation of short-run production analysis. The curve labeled TP in the top panel is the total product curvethe total number of TexMex Gargantuan Tacos produced per hour for a given amount of labor. Click the [TP] button to highlight this curve.
The increasingly flatter slope of the TP is attributable to the law of diminishing marginal returns. The MP curve is the marginal product curve.
Click the [MP] button to highlight this curve. The negatively-sloped portion of the MP curve is a direct embodiment of the law of diminishing marginal returns. Click the [AP] button to highlight this curve. The negatively-sloped portion of the AP curve is indirectly caused by the law of diminishing marginal returns. As marginal product declines, due to the law of diminishing marginal returns, it also causes a decrease in average product.
The Law of Supply While the law of diminishing marginal returns pops up throughout the study of economics, it is essential to an understanding of supply and the law of supply. It provides a bit of key insight into the question: If the production cost increases, then the sellers need a higher supply price.
Because the marginal product of a variable input declines with greater production, more of the variable input is needed, which increases production cost. This law of diminishing marginal returns is the counterpart of the law of diminishing marginal utility. As the law of diminishing marginal utility offers an explanation for the law of demand and the negative slope of the demand curvethe law of diminishing marginal returns offers an explanation for the law of supply and the positive slope of the supply curve.
Total product is the overall output that results from employing a specific quantity of resources in a given production system.
The total product concept is used to investigate the relation between output and variation in only one input in a production function. For example, suppose that Table represents a production system in which Y is a capital resource and X represents labor input.
It is also shown in column 2 of Table and is illustrated graphically in Figure. One would, of course, obtain other total product functions for X if the factor Y were fixed at levels other than two units. Figures illustrate the more general concept of the total product of an input as the schedule of output obtained as that input increases, holding constant the amounts of other inputs employed.
This figure depicts a continuous production function in which inputs can be varied in a marginal unbroken fashion rather than discretely. Suppose the firm wishes to fix the amount of input Y at the level Y1. Total, Marginal, and Average Product Curves: This is not a question of social equity but merely a consequence of the efforts of businessmen to produce as cheaply as possible. Further, the marginal products of the factors are closely related to marginal costs and, therefore, to product prices.
This, also, is a fundamental theorem of income distribution and one of the most significant theorems in economics. Its logic can be perceived directly. If the equality is violated for any factor, the businessman can increase his profits either by hiring units of the factor or by laying them off until the equality is satisfied, and presumably the businessman will do so.
Theory of production | economics | btcmu.info
The theory of production decisions in the short run, as just outlined, leads to two conclusions of fundamental importance throughout the field of economics about the responses of business firms to the market prices of the commodities they produce and the factors of production they buy or hire: The first explains the supply curves of the commodities produced in an economy.
Though the conclusions were deduced within the context of a firm that uses two factors of production, they are clearly applicable in general. Maximization of long-run profits Relationship between the short run and the long run The theory of long-run profit-maximizing behaviour rests on the short-run theory that has just been presented but is considerably more complex because of two features: It is of the essence of long-run adjustments that they take place by the addition or dismantling of fixed productive capacity by both established firms and new or recently created firms.
At any one time an established firm with an existing plant will make its short-run decisions by comparing the ruling price of its commodity with cost curves corresponding to that plant. If the price is so high that the firm is operating on the rising leg of its short-run cost curve, its marginal costs will be high—higher than its average costs—and it will be enjoying operating profits, as shown in Figure 3.
The firm will then consider whether it could increase its profits by enlarging its plant.
The effect of plant enlargement is to reduce the variable cost of producing high levels of output by reducing the strain on limited production facilities, at the expense of increasing the level of fixed costs.
In response to any level of output that it expects to continue for some time, the firm will desire and eventually acquire the fixed plant for which the short-run costs of that level of output are as low as possible. This leads to the concept of the long-run cost curve: These result from balancing the fixed costs entailed by any plant against the short-run costs of producing in that plant. The long-run costs of producing y are denoted by LRC y. The marginal long-run cost is the increase in long-run cost resulting from an increase of one unit in the level of output.
It represents a combination of short-run and long-run adjustments to a slight increase in the rate of output. It can be shown that the long-run marginal cost equals the marginal cost as previously defined when the cost-minimizing fixed plant is used.
Long-run cost curves Cost curves appropriate for long-run analysis are more varied in shape than short-run cost curves and fall into three broad classes. In constant-cost industries, average cost is about the same at all levels of output except the very lowest.
Constant costs prevail in manufacturing industries in which capacity is expanded by replicating facilities without changing the technique of production, as a cotton mill expands by increasing the number of spindles. In decreasing-cost industries, average cost declines as the rate of output grows, at least until the plant is large enough to supply an appreciable fraction of its market.
Decreasing costs are characteristic of manufacturing in which heavy, automated machinery is economical for large volumes of output. Automobile and steel manufacturing are leading examples. Decreasing costs are inconsistent with competitive conditions, since they permit a few large firms to drive all smaller competitors out of business. Finally, in increasing-cost industries average costs rise with the volume of output generally because the firm cannot obtain additional fixed capacity that is as efficient as the plant it already has.
The most important examples are agriculture and extractive industries. Criticisms of the theory The theory of production has been subject to much criticism. One objection is that the concept of the production function is not derived from observation or practice.
Even the most sophisticated firms do not know the direct functional relationship between their basic raw inputs and their ultimate outputs. This objection can be got around by applying the recently developed techniques of linear programmingwhich employ observable data without recourse to the production function and lead to practically the same conclusions. On another level the theory has been charged with excessive simplification. It assumes that there are no changes in the rest of the economy while individual firms and industries are making the adjustments described in the theory; it neglects changes in the technique of production; and it pays no attention to the risks and uncertainties that becloud all business decisions.
These criticisms are especially damaging to the theory of long-run profit maximization. On still another level, critics of the theory maintain that businessmen are not always concerned with maximizing profits or minimizing costs.
Theory of production
Though all of the criticisms have merit, the simplified theory of production does nevertheless indicate some basic forces and tendencies operating in the economy.
The theorems should be understood as conditions that the economy tends toward, rather than conditions that are always and instantaneously achieved. It is rare for them to be attained exactly, but it is just as rare for substantial violations of the theorems to endure.
Only the simplest aspects of the theory were described above.
Without much difficulty it could be extended to cover firms that produce more than one product, as almost all firms do. With more difficulty it could be applied to firms whose decisions affect the prices at which they sell and buy monopoly, monopolistic competitionmonopsony.
The behaviour of other firms that recognize the possibility that their competitors may retaliate oligopoly is still a theory of production subject to controversy and research.