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Costs associated with production


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Costs associated with production

  1. 1. Short-run production decisions simply refer to those made in a relatively short time, or those that are made to affect immediate production. As for Long-run production decisions, several other factors are looked into, such as the principles of factor substitution and other production alternatives such as make or buy decisions.
  2. 2. Marginal Costs sometimes referred to as incremental costs. Marginal costs is the extra or additional cost incurred in producing one additional unit of output. Quantity of Output (in units) Computed Total Costs (in Php) 0 Computed Marginal Costs (in Php) 55.00 30.00 1 85.00 25.00 2 110.00
  3. 3. Average Costs (AC) or unit costs are the computed individual costs of products given the total cost of producing this level of output. Average Fixed Costs is computed by dividing total fixed costs by the number of units being produced. Average Variable Costs is equal to total variable costs divided by the number of units.
  4. 4. No of units FC (in Php) VC (in Php) TC (in Php) 0 55.00 0.00 MC/u (in Php) 55.00 AC/u (in Php) AFC/u (in Php) AVC/u (in Php) Infinity Infinity Infinity 85.00 55.00 30.00 55.00 27.5 27.5 30.00 1 55.00 30.00 85.00 25.00 2 55.00 55.00 110.00
  5. 5. •The rising MC curve always cut the minimum point of the AC curve •Average costs and Average variable costs would fall in the early stages of production, only to rise again in later stages. •Average fixed costs would necessarily decline as production rises. •Note that MC intersects AC at its minimum.
  6. 6. The Law of Diminishing Marginal Returns It also brings about increasing costs. If a variable input is continuously increased given a fixed set of other inputs, output is expected to increase; however, it will inevitably come to point where they start declining(diminishing).