StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

Supply: Production, Costs, and Profits - Essay Example

Cite this document
Summary
Title: Supply - Production, Costs, and Profits Name: Professor: Institution: Course: Date: 1. Give a brief summary of economic costs. Economic costs can be defined as the sacrifice of performing an activity, following a course of action or a certain decision…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER98.3% of users find it useful
Supply: Production, Costs, and Profits
Read Text Preview

Extract of sample "Supply: Production, Costs, and Profits"

Download file to see previous pages

Constituents of Economic Costs Total Cost (TC): This is the sum of fixed cost and variable cost. Therefore; TC = FC + VC Fixed Costs (FC): These are costs associated with acquisition of fixed assets. They do not increase or reduce with the level of production. These include cost of purchasing land and machinery necessary for production to take place. Fixed cost is also referred to as total fixed cost (TFC) Variable Costs (TVC): These are costs which increase or decrease with the level of production.

These costs include costs of raw materials, wages and electricity costs and fuel costs among others. Average cost (AC): Average cost is also referred to as average fixed cost. It is calculated by dividing total cost with quantity of output, that is, TC/q where q is the quantity of output. Average cost can also be divided into two; average fixed cost and average variable cost. Average fixed cost (AFC) is calculated by dividing fixed cost by quantity of output. AFC reduces with increase in quantity of output.

Average variable cost (AVC) is derived from dividing variable cost with quantity of output. Average variable cost is depicted in a U-shaped curve. It has the same shape with the average cost curve but lies below the AC curve. Marginal Cost (MC): This is the cost of producing an additional unit of output. It is the change in total cost as a result of an increase in production by one unit. Its curve is also U-shaped. Marginal cost reduces with increase in production up to a point of cost minimization where an increase in production leads to an increase in MC (Boyes & Melvin, 2011). 2. Suppose a firm is operating at the minimum point of its short-run average total cost curve, so that marginal cost equals average total cost.

Under what circumstances would it choose to alter the size of its plant? Explain. A firm operating at the minimum point of its short-run average total cost curve, so that marginal cost equals average total cost, is at the points of tangency between the short-run average total cost curve and the long-run average total cost curve. These points can be seen in the diagram in red. Figure 1: SRATC’s and the LRATC (Source: Freeeconhelp.com) The long-run average total cost curve is demarked by the lowest points of every possible short-run average total cost curve (SRATC).

In the above diagram, the long-run average total cost curve is labeled as LRATC. When a firm is producing at the lowest level of SRATC1, the firm can only increase its plant size in order to increase its profitability. Increase in the plant size occurs in the long run. The firm should continue to increase its plant size up the point which it will be operating at the lowest level SRATC2. This is also the lowest point the LRATC. The firm will therefore be operating at constant returns to scale.

Constant returns to scale takes place when an equal percentage increase in all the factors of production leads to an equal percentage increase in output. Any level of production of output below the point of constant returns to scale occurs at economies of scale. Economies of scale take place when an equal percentage increase in all the factors of production leads to a greater percentage increase in output. When a firm is at this level, being bigger (increasing plant size) leads to higher efficiency and thus reduction in cost.

The firm should continue to increase its plant size up to the point where it attains constant returns to scale. If the firm increases its plant size above the level at

...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Supply: Production, Costs, and Profits Essay Example | Topics and Well Written Essays - 1000 words”, n.d.)
Retrieved from https://studentshare.org/macro-microeconomics/1471618-supply-production-costs-and-profits
(Supply: Production, Costs, and Profits Essay Example | Topics and Well Written Essays - 1000 Words)
https://studentshare.org/macro-microeconomics/1471618-supply-production-costs-and-profits.
“Supply: Production, Costs, and Profits Essay Example | Topics and Well Written Essays - 1000 Words”, n.d. https://studentshare.org/macro-microeconomics/1471618-supply-production-costs-and-profits.
  • Cited: 0 times

CHECK THESE SAMPLES OF Supply: Production, Costs, and Profits

Production in the Long Run

The overhead costs relative to the running costs will probably be high in industries where big networks and national distribution are necessary.... Name: Instructor: Course: Date: production in the Long Run production function relates to the quantity of factors input and the quantity output that results.... There are three measures of production; total product, average product and marginal product.... When it comes to marginal product, change in production is registered after the addition of capital employed....
7 Pages (1750 words) Essay

Costs, Revenues and Production Decisions

The discussion will initiate by reviewing the notions of costs and revenues and how these are related to the production decision of the firm.... Then the discussion shall move on to show how considerations of costs and revenues impact the production decision.... costs and output The primary decision that a producer has to take is to choose its input mix.... In particular, the firm's objective is to maximize its profits.... This involves identifying the level of output that maximizes its profits....
3 Pages (750 words) Essay

Costs of Next Generation iPads

This however means that on the other hand Apple won't be able to make quite the profit margin that it was evidently used to with the sale of every iPhone unit, although they will not be too much at loss as most of their profits will be from the 64 GB versions of the new iPads, that is if they sell.... This actually means that the more expensive iPads, if sold, will comfortably cover for the not so much profits earned by the company through the selling of the slightly affordable ones....
7 Pages (1750 words) Case Study

Profit, Oligopolies and Cartels

The competition for price and profits in an oligopoly due to interdependence cannot get out of control because all firms lose when a price war occurs.... They both have perfect information regarding prices, costs and market conditions.... nbsp; … Opportunity costs take into consideration how many of the firm's resources used in this project could have been used differently and how foregoing an alternative investment or project affects the overall firm's profit margin....
3 Pages (750 words) Assignment

Markets, Profits and Prices of Boeing

In the paper “Markets, profits and Prices of Boeing,” the author provides the analysis of fixed, variable and marginal costs combined with the identification of the market in which Boeing operates as well as the concept of opportunity costs of the offer made to its workers.... hellip; The author states that in the context of production, fixed costs are costs that do not change with the level of output they produce.... Whether the firm produces 1 million units of output or zero units of output, those costs must be paid....
8 Pages (2000 words) Case Study

ECO201: Microeconomics-Mod 4 CBT

For this study, the student will ECO201: Microeconomics-Mod 4 CBT - Supply: Production, Costs, and profits - Introduction For abusiness to be able to achieve a maximum profitability, the company should be able to produce sufficient supply in order to meet the market demand.... The implementation of Demand Chain Management (DCM) enables the managers to accurately determine the market demand wherein… Basically, failure of a company to satisfy the market demand as scheduled means that the company will lose a lot of business opportunity caused by production inefficiency or internal miscommunication....
2 Pages (500 words) Essay

Profits and Supply and Demand

The products include profits and Supply and Demand al Affiliation The project is of an idea by having the concept ment and justification to the financier as well as even looking at the feasibility analysis by checking the profitability of the business and stating projections.... The profits of the company are expected to grow with market operations, and the second-year sales target is $30,000.... The breakeven is $6,000 sales thus the sales above $6000 are all profits enough to finance future expansions....
2 Pages (500 words) Essay

The Theories of Profit Maximization

It hаs been recognized аt leаst since Аdаm Smith thаt profits аre the driving force in а cаpitаlist economy.... Hаbit, though not without importаnce, cаnnot be held responsible for the production аnd exchаnge of goods.... Аnd benevolence, however widespreаd, does not supply sufficient inducement for individuаls to use their own lаbor аnd property in generаting output, especiаlly when there is no guаrаntee of reciprocаl benevolence....
13 Pages (3250 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us