Isocost and its economic meaning. Isoquant and isocost
Option 11.
PRODUCTION FUNCTION OF THE FIRM, ISOQUANT AND ISOCOST.
2. Properties of isoquants. Substitution of production factors.
3. Isocost and equilibrium conditions of the firm.
In the cobweb model, the demand function is: Q D = 200 – P, and the supply function is: Q S = 0.5 P – 10.
The product is sold within five days. Determine the equilibrium price of the product. Find the volumes of supply and demand, as well as the price by day of the week, if on the first day the price was equilibrium, and on the second day demand increased by 30 units. goods?. Record your results in the table:
What is the equilibrium price after the increase in demand?
1.The production function of the company, its construction.
2. Properties of isoquants. Substitution of production factors.
In order to organize production at an enterprise, it is necessary to ensure the interaction of production factors.
Thus, factors of production for the production of a TV include: production facilities, machines, machines, equipment, labor of workers, the plot of land on which the building is built. industrial buildings and structures, etc.
Depending on the speed with which the amount of resources involved in production can change, they are divided into constant and variable. Those of them that remain unchanged over a certain period of time form constant factors of production, and those whose quantity changes form variable factors of production.
All production resources involved in the production process are available in limited quantities. As a result, the volume of production of goods and services is limited by the amount of available resources. Therefore, society as a whole and each commodity producer in particular is always faced with the task of using them most efficiently. Thus, the volume of goods produced is determined by the availability of the necessary resources. Moreover, various options for their use allow the commodity producer to obtain a larger or smaller amount of goods or services. Therefore, the enterprise should be interested in ensuring the most full use labor, material and financial resources and their optimal combination.
The relationship between the volume of output and the volume of attracted factors of production is reflected by the production function.
The production function indicates the possible maximum output (Q) for a certain combination of production factors within the framework of using a specific type of technology:
Where Q is the volume of output, L is the mass of attracted labor (labor); K – volume of capital used (means of production).
However, in modern conditions technology is considered as a completely independent factor of production. Then the production function takes the following form:
Where the new symbol M denotes production technology.
The influence of the economic order. It is clear that any enterprise operates in specific economic conditions and is directly influenced by national economic system. Therefore, it makes sense if, when analyzing the production function economic condition management will be perceived as a separate specific factor of production. It is believed that the symbol f is used to denote it in the production function formula.
The production function allows:
Determine the share of participation of each of them in the creation of goods and services.
By changing the ratio of factors, you can find a combination of factors that will achieve the maximum volume of production of goods and services.
To trace how production output changes with an increase or decrease in the use of certain factors of production by one unit, and, thus, to identify the production capabilities of the enterprise.
Determine the economic feasibility of producing a particular product.
Note that the production function is usually calculated for a specific technology.
For various types industries (automobiles, agricultural products, confectionery, etc.) the production function will be different, but they all have the following common properties:
* there is a limit to the increase in production volume that can be achieved by increasing the costs of one resource, all other things being equal;
* there is a certain mutual complementarity of production resources and their interchangeability (substitution). The complementarity of resources means that the absence of one or more of them makes the production process impossible - production stops. At the same time, factors of production are to a certain extent interchangeable. The lack of one of them can be compensated for by an additional amount of the other, i.e. resources can be combined with each other during the production process in different proportions;
* a differentiated assessment of the influence of each factor on the dynamics of product output is given in relation to certain periods of time.
The production function can be expressed graphically in the form of an isoquant - a curve reflecting various combinations of resources that can be used to produce a given volume of output. For example, the production of 1 ton of potatoes (Q) can be achieved through the use of different combinations of the amount of living labor (L) and technical means- capital (K).
As the main properties of the production function, we point out that:
1) each industry has its own production function;
2) within the framework of a certain technology may be allowed different variants combinations of main factors of production;
3) a radical change in technology inevitably causes a transition from one production function to another;
4) analysis of the production function involves searching for an option for organizing production that ensures maximum economic efficiency.
Conclusion: the technological method of production is reflected through the combination of production factors.
Production grid.
The production function draws our attention to three important circumstances:
1) the greater the volume of production factors involved, the greater the volume of output;
2) the same volume of output can be achieved with different combinations factors of production;
3) by reducing the scale of use of one factor, it is necessary to increase the volume of attraction of another factor of production.
All these provisions are confirmed by the production grid (Table 1).
Horizontally in Table 1 the volume of labor involved in production is indicated, and vertically the volume of capital is indicated.
By moving diagonally down and from left to right and increasing the volume of factors of production, we increase the volume of output from 20 to 115 units.
Table 1. Change in production output with a change in the volume of production factors involved (production grid)
Moving diagonally from left to right and up, the output volume (Q=75) remains constant
Isoquant. We will reflect this relationship between a fixed output volume and the ratio of two factors - labor and capital - on a special graph. As a result, we get a line called an isoquant (Fig. 2)
| Q=75 | ||||||
| 0 | 1 | 2 | 3 | 4 | 5 | L |
Rice. 2 Construction of an isoquant for an output volume of 75 units.
In Fig. the isoquant corresponding to the production of 1 ton of potatoes is depicted. It shows that there are many options for using resources to produce a given volume of potatoes. In one case, more manual labor (L) can be used - 70 man-hours and only 2 machine-hours (K) (point A), in another - 40 man-hours L and 3 K (point B), in the third - 20 person-hour L to 6 hours K (point C), etc.
An isoquant map is used to determine the maximum output that can be achieved for each combination of factors.
Isoquant analysis can be used to determine the marginal rate of technological substitution, i.e. the possibility of replacing one resource with another in the process of their use. This capability depends on the production function. There are functions in which resources are easily replaced, and there are also those where resources have rigid, unchanging proportions.
The marginal rate of technological substitution (MPTS) expresses the number of units of a given resource that can be replaced by a unit of another resource while keeping output constant.
Let us assume that the production technology of one car involves the use of 1000 hours of labor and 500 hours of work of machines and equipment. The ratio of labor to capital will be 2 hours of labor to 1 hour of machine work (point A).
To mechanize and automate production, the enterprise switches to using more capital-intensive production process, i.e. the production of one car will require less expenditure of living labor and more expenditure of material labor (machinery, equipment). In this example, the marginal rate of technological substitution of capital for labor is determined by the amount of capital that can replace each unit of labor without causing an increase or decrease in the volume of automobile production. The limiting rate of technological substitution at any point of the isoquant is equal to the slope of the tangent at this point multiplied by -1:
MPTS = - DK / DL (const Q),
where DK is a reduction or increase in the capital resource;
DL - reduction or increase in labor resource;
Q - production volume.
The curvature of the isoquant helps the manager determine exactly what reduction in labor costs will be required when introducing a new production technology. At point B, producing a car will require only 500 hours of labor and 1000 hours of machine work. The ratio of capital to labor here is only 0.5 hours of labor for every hour of work of machines and equipment.
Isoquant is a line reflecting options for combinations of production factors that can be used to produce a fixed volume of output for a specific period of time.
An isoquant is a graphical form of expressing a two-factor production function. It is objective in nature, as it reflects real economic processes.
Isoquant law: than in large sizes one factor of production is used, the less another factor is used.
Special configurations of isoquants. Under certain circumstances, an isoquant can take the form of a straight line. A straight-line isoquant assumes that the replacement of one factor by another is carried out in a proportion that is constant throughout the isoquant.
If it is possible to organize production, limiting itself to the use of only one type of economic resource (a situation of absolute substitutability), then in this case the isoquant will touch the axis of the opposite factor of production.
The solid nature of the line means that each option always has alternative options combining factors of production.
The concave isoquant reflects the fact that we have to deal with a flexible production function, when a reduction in the volume of use of one factor of production is compensated only by higher rates of growth in the volume of use of another factor (i.e., the ratio between the volume of labor and capital is continuously changing).
In conditions where the output of a fixed volume of products is possible only with a single combination of production factors, we have to admit that we are dealing with a rigid production function. With this combination of circumstances, the isoquant takes the form of a right angle.
3 Isocost and equilibrium conditions of the firm
Isocost is a line showing the combinations of factors of production that can be purchased for the same total amount of money. Isocost is also called the equal cost line. Isocosts are parallel lines because it is assumed that a firm can purchase any desired quantity of factors of production at constant prices. The slope of the isocost expresses the relative prices of factors of production. Each point on the isocost line has the same total cost. These lines are straight because factor prices have a negative slope and are parallel.
By combining isoquants and isocosts, the optimal position of the company can be determined. The point at which the isoquant touches (but does not intersect) the isocost indicates the cheapest combination of factors required to produce a certain volume of product. The figure shows a method for determining the point at which production costs for a given volume of production of a product are minimized. This point is located at the lowest isocost where the isoquant touches it.
Conditions for the firm's equilibrium.
It should be emphasized that the division of costs into fixed and variable can only be discussed in relation to the short-term period of operation of the company. In other words, based on the analysis of the types of costs and their dynamics, we can distinguish between the short-term and long-term periods of the company’s operation. In the short run, fixed costs remain unchanged; the firm can change the volume of output only by changing the value of variable costs. In the long run, all costs become variable, that is, this is a sufficiently long time interval for the firm to change its production capacity. So, in the presence of unemployment and the presence of appropriately qualified workers on the labor market, it is easy to increase the volume of production at the expense of the mass of living labor. A similar situation may occur when additional resources of raw materials or energy are used. Naturally, one has to take into account the specifics of production. Thus, an increase in production volume can be easily obtained by attracting additional workers. But a completely different situation arises when it is necessary to expand production capacities, areas production premises and so on. Here the required time is measured in months, and sometimes, say, in heavy engineering or metallurgy - in years. In the short term, it is impossible to commission new production facilities, but it is possible to increase their utilization. Within the long term, production capacity can be expanded. Of course, the scope of these periods for various industries are different. The division into two periods is of great importance in determining the strategy and tactics of the company in maximizing profits.
In the same industry there are not identical, but completely different firms with different scales, organization and technical base of production, and therefore with different levels of costs. Comparing the average costs of a company with the price level makes it possible to assess the position of this company in the market.
Three possible options for a company's position in the market are shown below. If the price line R only touches the average cost curve AC at the minimum point M , then the firm is only able to cover its minimum costs. Dot M in this case is the point of zero profit.
It should be especially emphasized that when we talk about zero profit, we do not mean that the company does not make any profit at all. As has already been shown, production costs include not only the costs of raw materials, equipment, and labor, but also the interest that firms could receive on their capital if they invested it in other industries.
If average costs are lower than price, then the firm, at certain production volumes (from Q 1 before Q 2 ) receives on average a profit higher than normal profit, i.e. excess profit . Finally, if the firm's average costs for any volume of production are higher than the market price, then this firm is suffering losses and will go bankrupt unless it is reorganized or leaves the market.
The dynamics of average costs characterize the position of the company in the market, but in itself does not determine the supply line and the point of optimal production volume. Indeed, if average costs are lower than prices, then on this basis we can only assert that in the range from Q 1 before Q 2 there is a zone of profitable production, and with production volume Q 3 , which corresponds to the minimum average costs, the company receives maximum profit per unit of product. However, does this mean that the point Q 3 is the point of optimal output where the firm reaches its equilibrium. The manufacturer, as you know, is not interested in profit per unit of production, but in the maximum total amount of profit received. The average cost line does not show where this maximum is reached. In this regard, it is necessary to consider the so-called marginal costs, i.e. the additional costs associated with producing an additional unit of output in the cheapest way possible. Marginal costs are obtained as the difference between production costs n units and production costs n -1 units:
MS=TS
n
-TS
n
-1
,
gross total costs. 
The dynamics of marginal costs are shown below.
The marginal cost curve does not depend on fixed costs because fixed costs exist regardless of whether an additional unit of output is produced. First, marginal cost decreases, remaining below average cost. This is explained by the fact that if costs per unit of production decrease, therefore, each subsequent product costs less than the average costs of previous products, i.e. average costs are higher than marginal costs. A subsequent increase in average costs means that marginal costs become higher than previous average costs. Thus, the marginal cost line intersects the average cost line at its minimum point M .
The production of an additional unit of product, while generating additional costs, on the other hand, also brings additional income, revenue from its sale. The amount of this additional, or marginal income (revenue) is the difference between the gross proceeds from the sale n And n -1 units of production: M.R. = TR n - TR n -1 . In conditions of free competition, as is known, the manufacturer cannot influence the level of the market price, and, therefore, sells any quantity of its products at the same price. This means that in conditions of free competition, additional income from the sale of an additional unit of production will be the same for any volume, i.e. marginal revenue will be equal to price: M.R. = P .
Having introduced the concepts of marginal cost and marginal revenue, we can now more accurately determine the firm's equilibrium point, or the point where it stops production, having achieved the maximum amount of profit possible at a given price. Obviously, the company will expand its production volume until each additional unit produced brings additional profit. In other words, as long as marginal cost is less than marginal revenue, the firm can expand production. If marginal cost exceeds marginal revenue, the firm will incur losses.
It is shown below that as production increases, the marginal cost curve ( MS) goes up and crosses the horizontal limit line 
income equal to market price P 1, at point M, corresponding to the production volume Q
1
. Any deviation from this point leads to losses for the company, either in the form of direct losses with a larger volume of production, or as a result of a reduction in the amount of profit with a decrease in output.
Thus, the equilibrium condition of the firm, both in the short and long term, can be formulated as follows: MS= M.R.. Any firm seeking profit seeks to establish a volume of production that satisfies this equilibrium condition. In a perfectly competitive market, marginal revenue is always equal to price, so the firm's equilibrium condition takes the form MS=P .
The ratio of marginal costs and marginal revenue is a kind of signaling system that informs the entrepreneur whether optimum production has been achieved or whether further profit growth can be expected. However, it is impossible to accurately determine the amount of profit a firm receives based on the dynamics of marginal costs, since, as already noted, they do not take into account fixed costs.
The total profit received by the firm can be determined as the difference between gross revenue ( TR) and gross costs ( TS). In turn, gross revenue is calculated as the product of the quantity of products and the price ( TR = Q * A.C.). Thus, only by combining the previously conducted analysis of marginal costs and marginal revenue with an analysis of the dynamics of average costs, we can accurately determine the amount of profit received.
Let's consider three possible market situations.
When the marginal revenue line just touches the average cost curve, gross revenue is exactly equal to gross cost. The firm's profit will be normal because the price of its product is equal to average cost.
If at some interval the line of price and marginal revenue is located above the average cost curve, then at the equilibrium point M the firm will receive quasi-rent, i.e. profits above normal levels. At optimal production volume Q 2 average costs will be equal C 2, therefore, the total costs will be the area of the rectangle O.C. 2 L.Q. 2 . Gross revenue (rectangle OP 2 MQ 2 ) will be larger, and the area of the shaded rectangle C 2 P 2 M.L. will show us the total amount of excess profit received.
The third figure shows a different situation: average costs for any volume of production exceed the market price. In this case, even with optimal production volume ( MS=P) the company incurs losses, although they are less than for other production volumes (area of the shaded rectangle P 3 C 3 L.M. is minimal precisely for the volume of production Q 3 ).
Let's look at this last situation in more detail. No one is immune from losses in a market economy. Therefore, if due to one reason or another (for example, unfavorable market conditions). The company does not make a profit, then it must minimize losses. If we consider the behavior of a company in the short term, when it still remains in a given market, then what is preferable for it - to continue working and producing products or to temporarily stop production? In which case will the losses be less?
Note that when a firm produces nothing, it only incurs fixed costs. If it produces products, then variable costs are added to fixed costs, but the company also receives some income from sales. Therefore, in order to understand when a company minimizes losses, it is necessary to compare the price level not only with average costs ( A.C.), but also with average variable costs ( AVC). Consider the situation shown below:
Market price P 1 below minimum average cost but above minimum average variable cost. At optimal production volume Q
1
the value of average production costs will be the segment Q
1
M, the value of average variable costs – segment Q
1
L. Therefore, the segment M.L. is the average fixed cost. If the firm continues to operate, then its gross revenue (rectangle OP
1
EQ
1
) will be less than total costs (rectangle O.C.
T
MQ
1
), but will be covered variable costs(rectangle OC v LQ
1
) and part of the fixed costs. The amount of losses will be measured by the area of the rectangle P
1
C
1
M.E.. If the company stops production, then the losses will amount to the entire amount of fixed costs (rectangle C v C
T
M.L.). Thus, as long as the price is above the minimum average cost, it is more profitable for the company in the short run to continue producing products, since in this case losses are minimized. If the price is equal to the minimum average variable cost, then it makes no difference to her whether to continue production or stop it. If the price falls below minimum average variable cost, then production must cease.
It is known that when the price changes, the firm will change production volumes, moving along the curve MS. By summing the individual supply curves of all firms in one industry, we obtain the aggregate industry supply curve. As the price gradually increases, various firms operating in the industry expand their production and their supply. A change in the market price for any product will occur until the aggregate demand for the industry's products equals the aggregate industry supply. Such equality is achieved at a certain price level, which then tends to maintain this level over the short term.
The solution of the problem
Let's determine the equilibrium price of the product on the first day; to do this, we equate the demand function to the supply function Q D =Q S ;
P=140 - equilibrium price
Let's find the volume of supply and demand on the first day
Q D =200-140=60 units.
Q S =0.5*140-10=60 units.
Finding the volume of demand on the second day
Q S =60+30=90 units.
This means that the equilibrium price after an increase in demand becomes
P= (Q S +10)/0.5
Isocost and cost-effective release
Let the firm use two factors of production - labor and capital, the prices of which are given. Let us denote the number of man-hours of labor by the letter L, and the number of machine hours of capital is the letter K. Let us denote the prices of one hour of work of labor and capital respectively P L And P K. Then the firm's total costs (TC) will be:
TC=P K *K+P L *L
Let’s assume that the total costs are currently set and amount to 100 rubles, the price of a man-hour of labor is 5 rubles, and each machine-hour of equipment operation costs 10 rubles. If, at a given cost, a firm decides to use only labor, then it can use a total of 20 man-hours. labor. In this case, however, the company will not have money left to purchase or rent equipment, i.e. the amount of capital used will be zero. If the company wants to use only capital, then 10 machine-hours are available to it. capital and 0 man-hours. labor. There are other possible combinations of labor and capital available to the firm at given costs and prices of production factors. For example, 12 person-hour. and 4 machine-hours. Or 8 person-hour. and 6 machine-hours. Etc.
By plotting all the quantities of labor available to the firm on the X-axis, and the quantities of capital on the Y-axis, we obtain an isocost. Isocosta(equal cost line) reflects all combinations of labor and capital for which the firm's total costs remain the same (Figure 7-1).
Rice. 7-1. Constructing an isocost
The isocost function can be easily derived by transforming the original total cost function:
TC=P K *K+P L *L P K *K=TC-P L *L
We have obtained the required function, reflecting the dependence of the amount of capital used on the amount of labor used for given total costs and prices for labor and capital.
It follows from this:
1. An increase in costs (from TS 1 to TS 2 and TS 3) shifts the isocost to the right - up parallel to the previous one (Fig. 7-2A);
2. Since - the slope of the isocost, the reduction in the cost of labor (increase in the cost of capital) at the same total costs makes the slope of the isocost flatter (Fig. 7-2B). Conversely, an increase in the cost of labor (decrease in the cost of capital) increases the slope of the isocost.
Rice. 7-2. Isocost shifts
You can verify this by first increasing total costs in our hypothetical example from 100 to 120, and then changing the prices of labor and capital at the same costs. See how the position of the isocost changes as a result.
The production function reflects the relationship between resource inputs and output. It is characterized by an isoquant. Isoquant shows different combinations of factors of production when producing the same amount of output. The isoquant curve has a negative slope and resembles By kind of an indifference curve. But utility, as a characteristic of the indifference curve, cannot actually be measured, whereas it is isoquant measurable (in the number of units, weight measure, etc.). Each of the combinations of production factors (5 in total) represents a separate technological method (Table 11.4). Total output increases as labor intensity increases, with fixed capital input. Output also increases when capital costs increase while labor costs are fixed.
Table 11.4
Results of product output for various combinations of production factors
The set of combinations of factors can increase or decrease in total. An isoquant map is a set of isoquants, each of which shows the maximum output achieved when using certain combinations of factors (Fig. 11.5). The isoquant curve located to the right and higher according to the graph shows a higher level of output (Q 3), and the one located to the left and lower shows a lower level of output (Q 2).
The law of diminishing returns applies to labor and capital. "The slope of the isoquant is defined as the ratio of the marginal product of capital to the marginal product of labor (based on Fig. 11.5). This ratio is expressed by MRTS - maximum rate of technological substitution:
MRTS LK = - (MR K / MP L).
As capital is replaced by labor, labor productivity begins to decline, and vice versa, when labor is replaced by capital, capital productivity or capital productivity decreases.
If the firm's budget and unit prices of resources (labor and capital) are known, then a line of equal costs can be constructed. This line is expressed as isocost, each point of which determines the ratio of units of two types of production factors that require the firm the same amount of costs for their use. In its appearance, the isocost resembles a budget line; changes in the angles of inclination of the line and its parallel shifts to the right or left can also occur, but from the position of the budgetary capabilities of the manufacturer (Fig. 11.6).
Parallel isocost shifts Rice. 11.6
Producer equilibrium position
Rice. 11.7
Producer Equilibrium occurs when he selects resources for production, and graphically - at the point of tangency between the isoquant and isocost (Fig. 11.7, at point E). This means a combination of labor and capital in which the firm produces maximum amount units of production with available purchased limited resources.
The long-term strategy of the company involves choosing the required scale of production and size of the company. If, when factors of production change by L times (L>0), the volume of output increases by more than L times, then such a process expresses positive effect of scale of production. Graphically, the distances between equilibrium points shifting to the right
isoquants and isocosts decrease. If, when factors of production change by L times (L>0), the volume of output increases by L times, then such a process expresses a constant effect of scale of production. Graphically, the distances between the isoquant and isocost equilibrium points shifting to the right are the same. If, when factors of production change by L times (L>0), the volume of output increases less than s L times, then the taxi process expresses negative effect from scale production. Graphically, the distances between the isoquant and isocost equilibrium points shifting to the right increase.
A positive effect can be the result of increasing the productivity of production factors through the introduction of advanced technologies, finding a market segment for goods and services in high demand, and developing new, more competitive product models. Constant economies of scale usually preclude significant innovation in production. Negative economies of scale are the result of a company's inefficient operation and its poor adaptation to dynamically developing market conditions.
Production costs and the rule of least
Costs
Based on the ultimate goal of its activities, any company must know what profit it will receive; for this, it must study demand, determine the selling price of its products, and compare its planned income with the costs to be incurred. Costs or expenses express everything that a manufacturer needs to produce a given, planned product in order to generate income and profit. In microeconomics, a firm's costs of resources and factors of production are of particular importance. In this regard, there is a classification of production costs.
Economists' understanding of costs is based on taking into account the limited resources and the possibility of their alternative use. They acquire a double meaning economic costs. Firstly, economic costs aimed at minimizing them in order to obtain maximum profits. Second, the economic or opportunity costs of producing a particular economic good are mentally equated to the cost of the best option for other possible costs. For example, the financial cost of producing or purchasing an additional 100 computers is the same as the opportunity cost of 20 home theater systems not being produced or purchased.
Economic costs can be internal and external. External or explicit costs- these are cash expenses in favor of outside suppliers, aimed at paying for the factors of production used. All the firm's explicit costs ultimately add up To reimbursement of basic revolving funds, remuneration of production and sales organizers. External costs are considered and how accounting costs. Internal or ridiculous costs- all kinds of opportunity costs aimed at using the company's own resources. They are equal to cash payments that could be spent to use these resources. “Taking into account explicit and implicit costs allows a firm to more accurately estimate benefits, revenues and profits.
In the short run, all costs can be either fixed or variable. Fixed costs (FC)- these are costs, the value of which does not depend on changes in production volume. They must be paid even if there is zero production. Fixed costs may include: payment of loan obligations, rent payments, insurance premiums, administration salaries, maintenance of security, payment for the most necessary minimum services of energy, communications, communications, etc. Variable costs (VC) - These are costs, the value of which depends on changes in production volume. These include expenses for renewable wages of employees, maintenance and reproduction of the company's fixed and working capital. Total costs (TC) - This is the sum of fixed and variable costs for each given volume of production:
TC = FC + VC.
An increase in output necessitates an increase in the cost of producing an additional unit of output, defined as marginal cost (MC):
MS=TS/Q,
The tabular and graphical form of types of costs clearly illustrates the types of costs and their interaction (Table and Fig. 11.8). According to the graph, FC has a horizontal appearance, since their value is unchanged, and VC and TC are parallel to each other by the value of FC and have an upward appearance with a positive slope.
Table iris. 11.8
| TR | F.C. | V.C. | TC | M.C. | A.C. |
| 353,333 | |||||
| 288,75 | |||||
ISOQUANT - a curve showing various combinations of factors of production that can be used to produce a given volume of product. Isoquants are also called equal product curves or equal output lines.
The slope of an isoquant expresses the dependence of one factor on another in the production process. At the same time, an increase in one factor and a decrease in another do not cause changes in the volume of output. This dependence shown in Fig. 21.1.
Rice. 21.1. Isoquant
A positive slope of an isoquant means that an increase in the use of one factor will require an increase in the use of another factor so as not to reduce output. A negative slope of an isoquant shows that a reduction in one factor (at a given level of production) will always cause an increase in another factor.
Isoquants are convex in the direction of the origin, because although factors can be replaced by one another, they are not absolute substitutes.
The curvature of the isoquant illustrates the elasticity of factor substitution in producing a given volume of product and reflects how easily one factor can be replaced by another. In the case when the isoquant is similar to a right angle, the probability of replacing one factor with another is extremely small. If the isoquant looks like a straight line with a downward slope, then the probability of replacing one factor with another is significant.
Isoquants are similar to indifference curves with the only difference that indifference curves express the situation in the sphere of consumption, and isoquants - in the sphere of production. In other words, indifference curves characterize the replacement of one benefits others (MRS), and isoquants are the replacement of one factor a others (MRTS).
The further the isoquant is located from the origin, the greater the volume of output it represents. The slope of the isoquant expresses the marginal rate of technical substitution (MRTS), which is measured by the ratio of the change in output. The marginal rate of technical substitution of labor for capital (MRTS LK) is determined by the amount of capital that can be replaced by each unit of labor without causing a change in output. The marginal rate of technical substitution at any point on the isoquant is equal to the slope of the tangent at that point multiplied by -1:
Isoquants can have different configurations: linear, rigid complementarity, continuous substitutability, broken isoquant. Here we highlight the first two.
Linear isoquant– isoquant expressing perfect substitutability of production factors (MRTS LK = const) (Fig. 21.2).
Rice. 21.2. Linear isoquant
Hard complementarity factors of production represents a situation in which labor and capital are combined in the only possible ratio, when the marginal rate of technical substitution is equal to zero (MRTS LK = 0), the so-called Leontief-type isoquant (Fig. 21.3).
Rice. 21.3. Rigid isoquant
Isoquant map is a set of isoquants, each of which illustrates the maximum allowable volume of production for any given set of factors of production. The isoquant map is alternative way production function images.
The meaning of an isoquant map is similar to the meaning of an indifference curve map for consumers. An isoquant map is similar to a contour map of a mountain: all higher altitudes are shown using curves (Figure 21.4).
An isoquant map can be used to show the possibilities of choosing among many options for organizing production within a short period, when, for example, capital is a constant factor and labor is a variable factor.
Rice. 21.4. Isoquant map
ISOCOST - a line showing combinations of factors of production that can be purchased for the same total amount of money. Isocost is also called the equal cost line. Isocosts are parallel lines because it is assumed that a firm can purchase any desired quantity of factors of production at constant prices. The slope of the isocost expresses the relative prices of factors of production (Figure 21.5). In Fig. 21.5, each point on the isocost line is characterized by the same total costs. These lines are straight because factor prices have a negative slope and are parallel.
Rice. 21.5. Isocost and isoquant
By combining isoquants and isocosts, the optimal position of the company can be determined. The point at which the isoquant touches (but does not intersect) the isocost means the cheapest combination of factors required to produce a certain volume of product (Fig. 21.5). In Fig. Figure 21.5 shows a method for determining the point at which production costs for a given volume of production of a product are minimized. This point is located at the lowest isocost where the isoquant touches it.
PRODUCER EQUILIBRIUM is a state of production in which the use of factors of production allows one to obtain the maximum volume of output, that is, when the isoquant occupies the point farthest from the origin. To determine the producer's equilibrium, it is necessary to combine the isoquant maps with the isocost map. The maximum output volume will be at the point where the isoquant touches the isocost (Fig. 21.6).
Rice. 21.6. Producer Equilibrium
From Fig. Figure 21.6 shows that the isoquant located closer to the origin of coordinates gives a smaller amount of output (isoquant 1). Isoquants located above and to the right of isoquant 2 will cause a change in a larger volume of factors of production than the manufacturer’s budget constraint allows.
Thus, the point of tangency between the isoquant and isocost (point E in Fig. 21.6) is optimal, since in this case the manufacturer receives the maximum result.
RETURN TO SCALE expresses the response of the volume of production to a proportional change in the quantity of all factors of production.
Distinguish three provisions of returns to scale.
Increasing Returns from scale - a situation in which a proportional increase in all factors of arbitrariness leads to an ever-increasing increase in the volume of product output (Fig. 21.7). Suppose that all factors of production doubled and the volume of product output tripled. Increasing returns to scale are due to two main reasons. Firstly, an increase in factor productivity due to specialization and division of labor with an increase in the scale of production. Secondly, increasing the scale of production often does not require a proportional increase in all factors of production. For example, doubling the production of cylindrical equipment (such as pipes) would require less than doubling the metal.
Constant return from scale is a change in the quantity of all factors of production, which causes a proportional change in the volume of product output. Thus, twice as many factors exactly double the volume of product output (Fig. 21.8).
Diminishing returns from scale is a situation in which a balanced increase in the volume of all factors of production leads to an ever smaller increase in the volume of product output. In other words, the volume of output increases to a lesser extent than the costs of production factors (Fig. 21.9). For example, all factors of production increased threefold, but the volume of production increased only twofold.
Rice. 21.7. Increasing returns to scale
Rice. 21.8. Constant returns to scale
Rice. 21.9. Diminishing returns to scale
Thus, in the production process there are increasing, constant and decreasing returns to scale of production, when a proportional increase in the quantity of all factors leads to an increased, constant or decreasing increase in the volume of product output.
Western economists believe that currently, in most types of production activities, constant return from scale. In many sectors of the economy increasing returns scale is potentially significant, but at some point it may give way to diminishing returns unless the process of increasing the number of giant firms is overcome, which makes management and control difficult, despite the fact that production technology stimulates the creation of such firms.
Isocost is a line showing the combinations of factors of production that can be purchased for the same total amount of money. Isocost is also called the equal cost line. Isocosts are parallel lines because it is assumed that a firm can purchase any desired quantity of factors of production at constant prices. The slope of the isocost expresses the relative prices of factors of production. In Fig. Each point on the isocost line has the same total costs. These lines are straight because factor prices have a negative slope and are parallel.
By combining isoquants and isocosts, the optimal position of the company can be determined. The point at which the isoquant touches (but does not intersect) the isocost indicates the cheapest combination of factors required to produce a certain volume of product. In Fig. shows a method for determining the point at which production costs for a given volume of product production are minimized. This point is located at the lowest isocost where the isoquant touches it.
The set of optimal points of the manufacturer, production, and, consequently, changing resource costs, reflects the development trajectory of the company.
38. Optimal combination of production factors. Company growth line.
Rice. 7-3. Cost effective release
In Fig. three isoquants and one isocost are placed. Recall that an isoquant reflects all combinations of labor and capital in which output remains unchanged. In this case, the isoquant located above and to the right of the previous one corresponds to a larger volume of output. The output volumes (q1, q2, q3) are given next to the corresponding isoquant. In turn, the isocost reflects all combinations of labor and capital available to the firm at given total costs and prices of labor and capital.
It follows from this that in parts A, B and C the output is the same, since they are all on the same isoquant. In this case, the total costs in points A and C are also equal, since these points belong to the same isocost. Incl. Costs are lower, because it involves using less labor and capital, i.e. belongs to a “lower” isocost, not shown in the figure.
We are, however, interested in what maximum output is achievable at a given total cost. The required output - q2 - is determined by the tangency point of the isocost and the highest available isoquant (i.e. E). To achieve this, the firm must use labor and capital. For all other combinations of production factors available to the firm, output will be less, since in these cases the firm will be at “lower” isoquants. At the same time, “higher” isoquants - for example, isoquant q3 - are located above the isocost, and, therefore, are not available to the company at given total costs and prices of labor and capital.
So, by using labor and capital, the firm maximizes production at a given cost. Therefore, i.e., corresponding to a given combination of labor and capital, is called the point of optimal combination of factors of production.
Let us recall that all points on any isoquant (for example, on isoquant q2) reflect various technically efficient ways of producing a given volume of output (topic 6, paragraph 1). But only in that case, output q2 is obtained at the lowest possible cost. Thus, the combination reflects a cost-effective way of producing products in volume q2.
Let us also remember that at any point on the isoquant, the marginal rate of technical replacement of capital by labor is equal to the ratio of the marginal products of labor and capital, i.e. equality is satisfied (topic 6, paragraph 2):
At the same time, at the point of optimal combination of production factors, the marginal rate of technical substitution is also equal to the ratio of the prices of labor and capital. In other words, the specified equality takes the form:
This can be justified like this. Let at some point on the isoquant the marginal product of labor be 10 units of a certain product, and the marginal product of capital be 5 units. The ratio of marginal products is therefore 2:1. In this case, the prices of labor and capital, let’s say, are equal, i.e. the price ratio is 1:1. Thus, the inequality holds:
As a result, by giving up one unit of capital, the firm loses 5 units of output. However, with the money saved, she can hire one more unit of labor, which will bring her an additional 10 units of output. Under such conditions, replacing capital with labor, the firm increases its output at constant costs, i.e. moves to a higher isoquant while remaining at the same isocost. The firm will, therefore, replace capital with labor until it reaches the point of optimal combination of factors, at which the ratios of marginal products and prices of labor and capital are equal to each other.
Now imagine that the firm finds itself at that point on the isoquant where the ratio of the marginal products of labor and capital is less than the ratio of their prices. In this case, it becomes profitable for her to replace labor with capital, again until the point of optimal combination of factors is reached.
Let's go further. Let the optimal combination of labor and capital be achieved. If a firm increases its costs, the isocost shifts to the right—up. Accordingly, the optimum points successively become E1, E2, E3 at increasingly higher isoquants. By connecting these points, we get the “development path” line (Fig. 7-4).
Figure 7-4. Line “path of development” (GROWTH LINE)
The change in the slope of this line indicates the use of which factor relatively increases with increasing production.
Firm's growth line (isoclinal): a line that defines the set of optimal production volumes of the firm as a set of tangents to the isocost and isoquant map. The isocline shows the firm's optimal production volumes at different production capacities.
39. Production costs and their structure. Accounting and economic costs. Accounting, economic and normal profit.
Production costs are a set of expenses that enterprises incur in the process of production and sales of products.
Production costs can be classified according to many criteria. From the firm's perspective, individual production costs are identified. They directly take into account the expenses of the business entity itself. Entrepreneurial firms have different individual production costs. In some cases, industry average and social costs are taken into account. Social costs are understood as the costs of producing a certain type and volume of products from the perspective of the entire national economy.
There are also production costs and circulation costs, which are associated with the phases of capital movement. Production costs include only those costs that are directly related to material creation, to the production of a product. Distribution costs include all costs caused by the sale of manufactured products. They include additional and net distribution costs.
Additional distribution costs include expenses associated with transportation, warehousing and storage of products, their packaging and packaging, and bringing the products to the direct consumer. They increase the final cost of the product.
Under opportunity costs(opportunity cost) we understand something that must be given up in order to get what we want.
Explicit (external) costs are opportunity costs that take the form of explicit (monetary) payments to suppliers of factors of production and intermediate goods.
This is the cost of services of factors of production that are used in the production of goods and services, but do not belong to the company. These costs are taken into account by the accountant and reflected in the financial statements, therefore they are called accounting costs.
Implicit (implicit, internal) costs of using resources owned by the owners of the company (or owned by the company as a legal entity), which are not received in exchange for explicit (monetary) payments.
From the point of view of the accountant's interests, only accounting costs should be considered. But this approach to determining the amount of production costs does not take into account one very important circumstance - the phenomenon of resource rarity and, in connection with this, the possibility of their alternative use. Therefore, from the point of view of an economist, when calculating production costs, it is necessary to take into account the entire amount of costs, regardless of whether they have a monetary value or not. Those who own businesses constantly weigh the viability of continuing to operate their business against what they lose by not doing so.
A special type of hidden cost is normal or zero profit. Normal profit is the minimum payment that the owner of the company must receive so that it makes sense for him to use his entrepreneurial talent in this field of activity. This is the minimum payment for the risk of working in this area of the economy. Each industry evaluates it differently. It is called normal for its similarity to other incomes, reflecting the contribution of a resource to production.
Economic profit is net profit that remains with the enterprise after deducting all costs, including the opportunity cost of distributing the owner's capital. In the case of a negative economic profit, the option of leaving the enterprise from the market is considered.
Accounting profit is the difference between the sales amount (sales income) and expenses (costs);
From the perspective of an individual firm, economic costs are the payments that must be made or the revenues that the firm must provide to the supplier of resources in order to divert these resources from use in alternative production.
Economic ed. = External ed. + Internal ed. - Normal profit
40. Production costs in the short term. Cost curves and the law of diminishing returns. Relationship between total costs.
There is also such a criterion for classifying costs as the time intervals during which they occur. From this point of view, production costs in the short term are divided into constant and variable, and in the long term all costs are represented by variables.
Fixed costs are those actual costs that do not depend on the volume of output l/juduction. Fixed costs occur even when products are not produced at all. They are related to the very existence of the company, i.e. with expenses for the general maintenance of a factory or plant (payment of rent for land, equipment, depreciation on buildings and equipment, insurance premiums, property tax, salaries to senior management personnel, payments on bonds, etc.).
Variable costs are those costs that change with changes in the quantity of products produced. Variable costs include expenses for raw materials, materials, fuel, electricity, payment transport services, payment for the most part labor resources(salary).
The amount of costs of any type per unit of production is expressed by the concept of “average costs”.
In the theory of firm costs, an important role belongs to marginal cost - the cost of producing an additional unit of output over and above the quantity already produced. MC can be determined for each additional unit of output by attributing changes in total costs to the number of units of output that caused the change.
Long term in the activities of a company is characterized by the fact that it is able to change the quantity of all production factors used, which are variable.
The long-run ATC curve shows the lowest cost of producing any given level of output, provided that the firm had the necessary time to change all its factors of production. The dynamics of the long-run average total cost curve can be explained using the so-called economies of scale of production.
Economies of production scale - reflect the response of the value of the total product to a proportional change in all resources.
Highlight three different shapes manifestations of this dependence:
constant economies of scale - manifests itself when the volume of production changes in proportion to the change in the quantity of all resources (hairdressing salons, weaving factories and DR-).
positive economies of scale. As the size of an enterprise grows, a number of factors can be identified that determine the reduction in average production costs:
diseconomies of scale is that over time, the expansion of firms can lead to negative economic consequences and, therefore, to an increase in unit production costs. The main reason for the occurrence of negative economies of scale is associated with certain management difficulties.
41. The relationship between average and marginal costs in the short term. Construction of average and marginal cost curves.
The marginal cost curve intersects the average variable and average total cost curves at the points of their minimum values. Average variable costs and average total costs decline as long as marginal costs are less than their values. Therefore, the average variable and average total cost curves become downward sloping as long as the marginal cost curve is below the average variable and average total production cost curves, respectively.
Average costs is the cost per unit of production. The role of average costs in economic analysis determined by the fact that, as a rule, the price of a product (service) is set per unit of production (per piece, kilogram, meter, etc.). Comparing average costs with price allows you to determine the amount of profit (or loss) per unit of product and decide on the feasibility of further production. Profit serves as a criterion for choosing the right strategy and tactics for a company.
The following types of average costs are distinguished:
Average fixed costs ( AFC – average fixed costs) – fixed costs per unit of production: АFC = F.C. / Q.
As production volume increases, fixed costs are distributed over an increasing number of products, so that average fixed costs decrease (Fig. 5.4);
Average variable costs ( AVC – average variable costs) – variable costs per unit of production: AVC = V.C. / Q.
As production volume increases AVC first they fall, due to increasing marginal productivity (profitability) they reach their minimum, and then, under the influence of the law of diminishing returns, they begin to increase. So the curve AVC has an arched shape (see Fig. 5.4);
average total costs ( ATS – average total costs) – total costs per unit of production:
ATS = TS / Q.
Average costs can also be obtained by adding average fixed and average variable costs:
ATC = A.F.C. + AVC.
The dynamics of average total costs reflects the dynamics of average fixed and average variable costs. While both are decreasing, average total costs are falling, but when, as production volume increases, the growth of variable costs begins to outpace the fall in fixed costs, average total costs begin to rise. Graphically, average costs are depicted by summing the curves of average fixed and average variable costs and have a U-shape (see Fig. 5.4).
Rice. 5.4. Ed. production per unit of production:
MS – limit, AFC – average constants, АВС – average variables,
ATS – average total production costs
The concepts of total and average costs are not enough to analyze the behavior of a company. Therefore, economists use another type of cost - marginal.
Marginal cost (MS – marginal costs) are the costs associated with producing an additional unit of output.
The marginal cost category is of strategic importance because it allows you to show the costs that the company will have to incur if it produces one more unit of output or
save if production is reduced by this unit. In other words, marginal cost is a value that a firm can directly control.
Marginal costs are obtained as the difference between total production costs ( n+ 1) units and production costs n product units:
MS = TCn+1 – TCn or MS=D TS/D Q,
where D is a small change in something,
TS– total costs;
Q- volume of production.
42. Production costs in the long run. Construction of the LTC curve.
The main feature of costs in the long run is the fact that they are all variable in nature - the firm can increase or reduce capacity, and it also has enough time to decide to leave a given market or enter it by moving from another industry. Therefore, in the long run, average fixed and average variable costs are not distinguished, but average costs per unit of production (LATC) are analyzed, which in essence are also average variable costs.
To illustrate the situation with costs in the long run, consider a conditional example. Some enterprise expanded over a fairly long period of time, increasing its production volumes. The process of expanding the scale of activity will be conditionally divided into three short-term stages within the analyzed long-term period, each of which corresponds to different enterprise sizes and volumes of output. For each of the three short-term periods, short-term average cost curves can be constructed for different enterprise sizes - ATC1, ATC2 and ATC3. The general average cost curve for any volume of production will be a line consisting of the outer parts of all three parabolas - graphs of short-term average costs.
In the example considered, we used a situation with a 3-stage expansion of the enterprise. A similar situation can be assumed not for 3, but for 10, 50, 100, etc. short-term periods within a given long-term period. Moreover, for each of them you can draw the corresponding ATS graphs. That is, we will actually get a lot of parabolas, a large set of which will lead to the alignment of the outer line of the average cost graph, and it will turn into a smooth curve - LATC. Thus, long-run average cost (LATC) curve represents a curve that envelops an infinite number of short-term average production cost curves that touch it at their minimum points. The long-run average cost curve shows the lowest cost per unit of production at which any level of output can be achieved, provided that the firm has time to change all factors of production.
In the long run there are also marginal costs. Long Run Marginal Cost (LMC) show the change in the total amount of costs of the enterprise in connection with a change in the volume of output of finished products by one unit in the case when the company is free to change all types of costs.
The long-run average and marginal cost curves relate to each other in the same way as the short-run cost curves: if LMC lies below LATC, then LATC falls, and if LMC lies above laTC, then laTC rises. The rising portion of the LMC curve intersects the LATC curve at the minimum point.
There are three segments on the LATC curve. In the first of them, long-term average costs are reduced, in the third, on the contrary, they increase. It is also possible that there will be an intermediate segment on the LATC graph with approximately the same level of costs per unit of production at different meanings output volume - Qx. The arcuate nature of the long-term average cost curve (the presence of decreasing and increasing sections) can be explained using patterns called positive and negative effects of increased scale of production or simply scale effects.
The positive effect of scale of production (the effect of mass production, economies of scale, increasing returns to scale of production) is associated with a decrease in costs per unit of production as production volumes increase. Increasing returns to scale of production (positive economies of scale) occurs in a situation where output (Qx) grows faster than costs rise, and therefore the enterprise's LATC falls. The existence of a positive effect of scale of production explains the descending nature of the LATS graph in the first segment. This is explained by the expansion of the scale of activity, which entails:
1. Increased labor specialization. Labor specialization presupposes that diverse production responsibilities are divided among different workers. Instead of carrying out several different production operations at the same time, which would be the case with a small-scale enterprise, in conditions of mass production each worker can limit himself to one single function. This results in an increase in labor productivity and, consequently, a reduction in costs per unit of production.
2. Increased specialization of managerial work. As the size of an enterprise grows, the opportunity to take advantage of specialization in management increases, when each manager can focus on one task and perform it more efficiently. This ultimately increases the efficiency of the enterprise and entails a reduction in costs per unit of production.
3. Effective use capital (means of production). The most efficient equipment from a technological point of view is sold in the form of large, expensive kits and requires large production volumes. Use of this equipment major manufacturers allows you to reduce costs per unit of production. Such equipment is not available to small firms due to low production volumes.
4. Savings from using secondary resources. A large enterprise has more opportunities to produce by-products than a small company. A large firm thus makes more efficient use of the resources involved in production. Hence the lower costs per unit of production.
The positive effect of scale of production in the long run is not unlimited. Over time, the expansion of an enterprise can lead to negative economic consequences, causing a negative effect of scale of production, when the expansion of the volume of a company's activities is associated with an increase in production costs per unit of output. Diseconomies of scale occurs when production costs rise faster than production volume and, therefore, LATC rises as output increases. Over time, an expanding company may encounter negative economic facts caused by the complication of the enterprise management structure - the management floors separating the administrative apparatus and the production process itself are multiplying, top management turns out to be significantly removed from the production process at the enterprise. Problems arise related to the exchange and transmission of information, poor coordination of decisions, and bureaucratic red tape. The efficiency of interaction between individual divisions of the company decreases, management flexibility is lost, control over the implementation of decisions made by the company's management becomes more complicated and difficult. As a result, the operating efficiency of the enterprise decreases and average production costs increase. Therefore, when planning its production activities, a company needs to determine the limits of expanding the scale of production.
In practice, cases are possible when the LATC curve is parallel to the x-axis at a certain interval - on the graph of long-term average costs there is an intermediate segment with approximately the same level of costs per unit of output at different values of Qx. Here we are dealing with constant returns to scale of production. Constant returns to scale occurs when costs and output grow at the same rate and, therefore, LATC remains constant at all output levels.
Appearance The long-term cost curve allows us to draw some conclusions about the optimal enterprise size for different sectors of the economy. Minimum effective scale (size) of an enterprise- the level of output from which the effect of savings due to an increase in the scale of production ceases. In other words, we are talking about such values of Qx at which the company achieves the lowest costs per unit of production. The level of long-term average costs determined by the effect of economies of scale affects the formation of the effective size of the enterprise, which, in turn, affects the structure of the industry. To understand, consider the following three cases.
1. The long-term average cost curve has a long intermediate segment, for which the LATC value corresponds to a certain constant (Figure a). This situation is characterized by a situation where enterprises with production volumes from QA to QB have the same cost. This is typical for industries that include enterprises of different sizes, and the level of average production costs for them will be the same. Examples of such industries: wood processing, timber industry, food production, clothing, furniture, textiles, petrochemical products.
2. The LATC curve has a fairly long first (descending) segment, in which there is a positive effect of production scale (Figure b). The minimum cost is achieved with large production volumes (Qc). If technological features production of some goods generate a long-term average cost curve of the described form, then large enterprises will be present in the market for these goods. This is typical, first of all, for capital-intensive industries - metallurgy, mechanical engineering, automotive industry, etc. Significant economies of scale are also observed in the production of standardized products - beer, confectionery, etc.
3. The falling segment of the long-term average costs graph is very insignificant; the negative effect of scale of production quickly begins to work (Figure c). In this situation, the optimal production volume (QD) is achieved with a small output volume. If there is a large-capacity market, we can assume the possibility of the existence of many small enterprises producing this type of product. This situation is typical for many industries of light and Food Industry. Here we are talking about non-capital-intensive industries - many types retail, farms, etc.
43. Long-term and average costs. Construction of the LATC curve. Scale effects and the shape of the LATC curve.
Average costs
In order to more clearly determine the possible production volumes at which the company protects itself from excessive increases in production costs, the dynamics of average costs are examined.
If gross costs are related to the number of products produced, we get average costs(curve).
This type of average cost curve is determined by the following circumstances:
Initially, moving from left to right, there is a large share of fixed costs, which decreases to point . This happens because the effect of mass production is achieved, when fixed costs are distributed over a larger volume of production.
then, when moving to the right from point , control difficulties arise and transportation costs increase
Average costs are distinguished:
Average constants ()
Average variables()
Average total cumulative()
Average fixed costs- represent fixed costs, per unit of production.
Average variable costs- represent variable costs per unit of production.
Unlike average constants, average variable costs can either decrease or increase as output volumes increase, which is explained by the dependence of total variable costs on production volume. Average variable costs!!AVC?? reach their minimum at a volume that provides the maximum value of the average product.
Let us prove this position:
Average variable cost (by definition), but
Amount of variable factor;
Unit price of variable factor,
and the output volume is .
Thus,
If , then , , which is what needed to be proven.
Average total costs (total) costs - show the total costs per unit of production.
In the long term, all costs act as variables, since over a long-term time interval the volumes of not only fixed but also variable costs can change. Long-term time interval analysis is carried out on the basis of long-term average and marginal costs.
Long-run average costs- these are costs per unit of output that can be changed optimally. The peculiarity of changes in long-term average costs is their initial decrease with the expansion of production capacity and growth in production volume. However, the introduction of large capacities ultimately leads to an increase in long-term average costs. The long-run average cost curve on the graph goes around all possible short-run cost curves, touching each of them, but not crossing them. This curve shows the lowest long-run average cost of producing each level of output when all factors are variable. Each short-run average cost curve corresponds to an enterprise whose size is larger than its predecessor. A change in long-run average costs implies a change in the scale of production. Associated with these changes is the concept "economy of scale". Economies of scale can be positive, negative and permanent.
Positive economies of scale(economies of scale) arise when production is organized in such a way that long-term average costs decrease as the volume of output increases. Such an organization of production is possible only under the condition of specialization of production and management. The large scale of production allows for more efficient use of the labor of management specialists due to deeper specialization of production and management. Another important condition for economies of scale is the use of efficient technology.
The cause of diseconomies of scale serves to disrupt the controllability of excessively large production. Under these conditions, long-run average costs increase as output increases.
In conditions where long-term average costs do not depend on the volume of output, there arises constant economies of scale.
Long-run marginal cost are associated with the production of an additional unit of output, when it is possible to change all factors of production in an optimal way. The change in marginal costs can be represented graphically as long-run marginal cost curve(Fig. 10.5).
Rice. 10.5. Long run average cost curve.
This curve shows the increase in costs associated with producing an additional unit of output when all factors of production are variable. The short-run marginal cost curves that correspond to any fixed production will be lower than the long-run marginal cost curve for low output levels, but higher for high output levels where diminishing returns are significant. The long-run marginal cost curve will rise more slowly than the short-run marginal cost curve of any given production. This is explained by the fact that all types of costs in the long run are variable and diminishing returns are less significant. The long-run marginal cost curve intersects the long-run average cost curve at its minimum point.
Thus, the long-term period for the company is sufficient for the company to have time to change the amount of all resources used, including the size of the enterprise. Therefore, all costs in the long run are considered variable.
44. TR, AR, MR: their essence and formulas. Normal profit. Economic and accounting profit. Profit maximization rule.
Profit in a market economy is a monetary incentive for conducting economic and production activities, the difference between total income and total costs. Costs for raw materials, equipment, wages, etc. are called implicit or accounting costs and are characterized only by monetary costs. Based on this, accounting profit is the difference between total revenue and implicit costs.
To assess the financial situation of an enterprise, the services of an accountant are required. If he believes that the company is developing intensively and regularly makes a profit, this does not mean that the profit here is a positive value. In economic terms, it may well turn out to be negative, which indicates an irrational investment of capital and ineffective use of production factors.
It turns out that the company did not take into account alternative opportunities and chose an industry where its profits are relatively small. Thus, economic profit is the difference between opportunity costs, i.e. those that the company bears at the moment, and those that could be if the company specialized in something else and rationally distributed the resources at its disposal.
In economics, normal profit is also distinguished as something between accounting and economic profit. It represents the minimum level of profit required for more or less high development of the company. The question depends on this value: is it worth continuing to engage in this type of activity in the future or do you need to change your specialization? If the owner of a company manages it himself, without the involvement of managers, and invests his own capital in the business, then normal profit in this case acts as a fair assessment of his work and business risk. And income consists of two parts. The first is the fee for managing the company and running the business - this is wage entrepreneur-owner.
The second part is determined by the fact that the capital of the company is the capital of the entrepreneur, and he voluntarily invests it in the business, at great risk of losing everything. In the case when a company is managed by a group of individuals - shareholders (JSC), or managers, then normal profit represents the optimal payment for the use of the company's capital.
In addition, this is the amount of implicit costs that determines the alternative choice of activity for each of the shareholders. In other words, this is the return that shareholders could have received if they had found more best use own capital, i.e. invested it in another business or at interest in the bank.
Profit maximization (loss minimization) is achieved at a production volume corresponding to the equilibrium point of marginal revenue and marginal costs. This pattern is called the profit maximization rule.
The profit maximization rule means that the marginal products of all factors of production in monetary terms are equal to their prices, or that each resource is used until its marginal product in monetary terms is equal to its value.
Increasing production output increases the profit of the enterprise. But only if the income from the sale of an additional unit of production exceeds the production costs of this unit (MR is greater than MC). In Fig. 1 this conditionally corresponds to the output volumes A, B, C. Obtained as a result of the release of these units additional profits are highlighted in the figure with bold lines.
MR – marginal revenue; MC – marginal cost
Rice. 1. Profit maximization rule
When the costs associated with the release of one more unit of product are higher than the income generated through its sale, the enterprise only increases its losses. If MR is less than MC, then it is unprofitable to produce additional goods. In the figure, these losses are marked with thick lines above points D, E, F.
Under these conditions, maximum profit is achieved at the volume of production (point O) where the increasing marginal cost curve intersects the marginal revenue curve (MR = MC). As long as MR is greater than MC, an increase in production produces an increasingly smaller profit. When, after the intersection of the curves, the MR MC ratio is established, a reduction in production leads to an increase in profit. Profit increases as it approaches the point where marginal cost and revenue are equal. Maximum profit is achieved at point O.
Under perfect competition, marginal revenue is equal to the price of the product. Therefore, the profit maximization rule can be presented in another form:
In Fig. 2 rule of profit maximization is applied to the process of choosing the optimal production volume for three most important market situations.
Rice. 2. Optimization of production volume in conditions of maximizing profits A), minimizing losses B), and cessation of production C).
In conditions of perfect competition, profit maximization (loss minimization) is achieved at a production volume corresponding to the point of equality of price and marginal costs.
Rice. 2 shows how choice occurs under conditions of profit maximization. A profit-maximizing enterprise sets its production volume at the level Qo corresponding to the intersection point of the MR and MC curves. In the figure it is indicated by point O.
Total (total) income(TR) is the total amount of money received from the sale of a certain quantity of a product. It is determined by multiplying the price of the product by the number of units sold:
where TR is total income; P - unit price of goods; Q is the number of units sold.
Average income(AR) is the revenue from the sale of a unit of production, i.e. gross income per unit of products sold. It acts as the price per unit of production for the buyer and as the profit per unit of production for the seller.
Average income is equal to the quotient of total income divided by the number products sold and is calculated by the formula
AR = TR: Q, where AR is average income; TR - total income; Q is the number of units sold.
At a constant price, the average income is equal to the selling price, which is obvious from the above formula
where P is the price of a unit of production.
Marginal (additional) income(MR) is the additional income to the total income of the company obtained from the production and sale of one additional unit of goods. It makes it possible to judge the efficiency of production, as it shows the change in income as a result of an increase in output and sales of products by an additional unit.
Marginal revenue allows you to evaluate the possibility of recoupment of each additional unit of output. In combination with the marginal cost indicator, it serves as a cost guide for the possibility and feasibility of expanding the production volume of a given company.
Marginal revenue is defined as the difference between the total income from the sale of n + 1 units of goods and the total income from the sale of n goods:
MR = TR(n+1) - TRn, or calculated as MR = ΔTR/ΔQ,
where ΔTR is the increment in total income; ΔQ is an increase in output by one unit.
Under conditions of perfect competition, a firm sells additional units of output at a constant price, since any seller cannot influence the established market price. Marginal revenue will be equal to the unit price (MR - P), since ΔTR = PΔQ, therefore MR = PΔQ / ΔQ = P.
45. The state as an economic entity. Microeconomic regulation, its directions and tools.
The economic role of the state is quite large; being part of the entire economy of society, it at the same time regulates the entire system of economic relations.
As an economic entity, the state is subject to the fundamental laws of one of the branches of economic theory - microeconomics.
The state is a huge economic entity that has both legal rights in the economic sphere and has a huge segment of the economy as a whole to carry out the functions of regulating economic employment, economic growth, and in general its activities are aimed at achieving the economic goals of society.
As an economic entity, the state is a community of people and institutions responsible for managing the country's economic resources, foreign and domestic economic policy. The term is also used when talking about all possible economic resources, instruments and factors that make up the country’s economy.
That is, depending on the context, the state can be considered as all those holding power in the country who have a direct influence on government decisions in the field of economics or as what makes up the economic situation in the country (money, production, other resources and factors that have positive and negative influences on the situation in the state treasury in general)
Functions of the state as a subject of macroeconomic regulation:
1. Target – consists of defining goals, priorities and main directions for the development of the national economy.
2. Regulatory - the state, with the help of legislation, the regulatory framework, establishes the rules of activity for economic entities, determines the legal field of activity.
3. Corrective - distribution of resources in the economy in order to develop progressive processes, elimination negative consequences(externalities) and ensuring normal socio-economic conditions for the life of society.
4. Social - state regulation of socio-economic relations, redistribution of income, provision of social protection, social rights and guarantees.
5. Direct management of the non-market sector of the economy - regulation of the public sector of the economy, creation of public goods and benefits.
6. Stimulating – the formation of regulators capable of effectively influencing the activities of business entities and stimulating economic processes in the direction desirable for society.
7. Test – state supervision and monitoring the implementation of laws, regulations, established economic, environmental and social standards.
The implementation of the economic functions of the state is carried out through the created mechanisms: budgetary, fiscal, monetary, structural, investment, pricing, social, foreign economic and other areas of socio-economic policy.
To solve complex socio-economic problems, fully take into account private, collective and public interests and formulate thoughtful decisions, the state can involve scientific institutions, political parties, public and religious organizations.
The implementation of socio-economic policy, the choice of methods and means of state development depend on the activities of the state apparatus, taking into account the shortcomings of the state.
The shortcomings of the state are its inability to provide effective influence on the distribution of limited resources and the inconsistency of the policy for the distribution of limited resources with the prevailing ideas of justice in society. There are four groups of factors that negatively affect the justification and implementation of government management decisions in the field of gas exploration. This:
1) Limited information.
2) The inability of the state to fully control the reaction of counterparties to its actions (excessive government intervention in the economy can cause negative side effects(externalities).
3) Imperfection of the political process (under the influence of voters, special interest groups (lobbyists), political manipulation, etc. government bodies are capable of applying inadequate methods of regulation and thereby pursuing ineffective policies).
4) Limited control over the state apparatus (features of the position and behavior of the bureaucracy can increase the inefficiency of the functioning of the economy, in particular lead to excessive growth of the administrative apparatus and an unjustified increase in budget costs).
The real economy is characterized by situations where both market failures and government intervention disadvantages occur simultaneously. At the same time, it is most often possible to weaken the influence of some shortcomings only by strengthening the influence of others. When making economic decisions, one should compare the consequences of the influence of market and state shortcomings in order to determine the optimal form and boundary of government regulation.
The theory of state regulation of the economy proclaims the need for a systematic approach to the choice of means and methods of state influence on subjects of economic relations. Systems approach provides for the integration into an integral system, firstly, of elements that form the strategy of socio-economic development, and secondly, of elements that form a subsystem of regulators.
46. National economy and problems of measuring its results Main macroeconomic indicators. Gross national product (GNP). Gross domestic product (GDP).
The national economy can be defined as a historically established system of social reproduction of the country, interconnected industries, types of production and territorial complexes, i.e. a system that covers all established forms of social division and cooperation of labor.
The national product is the result of the functioning of the country's economy and the activities of its economic entities.
National product- these are all goods and services created in a given country over a certain period of time (usually a year).
In most developed and developing countries, the national product is the sum of goods and services produced in all sectors of the economy. It is calculated using the System of National Accounts (SNA), which represents an attempt to interrelate economic development indicators at the macro level.
Gross national product represents the market value of all final goods and services produced in an economy over a given period of time (usually a year).
The calculation of GNP is based on the national principle: the cost of products produced by residents of a given country is taken into account, regardless of their location.
Gross domestic product. This indicator is a kind of modification of GNP, but unlike the latter, it covers the results of activities in the territory of a given country of all economic entities, regardless of their nationality. The difference between GNP and GDP is twofold. On the one hand, when calculating GDP, the amount of income from the use of the country’s resources abroad (wages, interest, dividends, etc.) is subtracted from GNP. On the other hand, when calculating GDP, similar incomes of foreigners received in a given country are added to GNP.
47. Nominal and real GDP. Price indices. GDP deflator.
In economic theory, the following types are distinguished: GDP(GNP):
*nominal GDP(GNP) - calculated in current or current prices;
*real GDP(GNP) - adjusted nominal GDP taking into account the price level (inflation or deflation).
For example, real GDP is calculated using the formula:
Real GDP = (Nominal GDP/Price Index) x 100
Real GDP is a more accurate characteristic of the national economy. The ratio of nominal to real GDP shows the change in GDP as a result of price changes and is called GDP deflator.
48. National income, Net national product. Personal income. Disposable income.
The total income in an economy received by the owners of factors of production is called gross domestic income.
If we add the balance of factor income from abroad to gross domestic income, which is the sum of primary income, we get gross national income.
Net National Product (NNP) is the gross national product (GNP) adjusted for depreciation (the amount of capital consumed in the current year's production). It measures the total annual production of final goods And services that the economy as a whole, including households, firms, government, and foreigners, is able to consume without impairing the country's production capabilities for subsequent years.
NNP = GNP - depreciation
National income (NI) is a measure of the income that suppliers economic resources received from participation in the current production of products. ND shows how much it costs society, in terms of resource consumption, to produce a given volume of final products. The only component of NNP that does not reflect the current contribution of economic resources is indirect business taxes, since the government does not directly invest anything in production in exchange for taxes. In this case, the state cannot be regarded as a supplier of economic resources (factors of production). Thus, in order to determine the indicator of the total volume of wages, rent payments, interest and profits received during the production of the GNP volume of a given year, indirect business taxes should be subtracted from the NNP:
ND = NNP - indirect taxes on business
Personal income (PD) represents income received, in contrast to national income, which is earned income. The fact is that part of earned income - social security contributions, corporate income taxes and retained corporate earnings - does not reach households. At the same time, transfer payments, which are not the result of the employee’s economic activity, essentially represent a part of household income. Therefore, from the national income one should subtract three types of income that are earned but not received, and add income received but not the result of the current labor activity:
LD = ND - social security contributions - corporate income taxes - retained corporate earnings + transfer payments
Disposable income (Disposable income) is income that is at the personal disposal of members of the society after payment of individual taxes (personal income taxes, personal property taxes and inheritance taxes):
RD = LD - individual taxes
Price index- a statistical indicator used to measure price dynamics in time and space, represents relative size. Methodology for the principles of calculating price indices: determining a set of goods; selection of basic objects through a representative sample (enterprises in various industries, trade, services); selection of a system for weighing indicators and a formula for calculating indices. Price index calculations provide the construction of actual price indices and average price indices. The average price index takes into account, along with changes in prices for individual goods, structural changes. The set of representative goods includes all the most important groups of goods, taking into account their share in the entire population under study.
Price indices are used to monitor the movement of prices and tariffs, study market conditions, study the impact of price dynamics on the standard of living of the population, calculate indicators of living standards, macro-level indicators - gross national product (GNP), gross domestic product (GDP), national income, determine their speakers at comparable prices; to ensure international comparisons on the most important macroeconomic indicators, etc.
49. Aggregate demand. Aggregate demand curve. Factors determining its trajectory. Non-price factors of aggregate demand.
Aggregate demand is the demand for the total volume of goods and services that can be supplied at a given price level.
Aggregate demand reflects the relationship between the volume of aggregate output demanded by economic agents: the population, enterprises and the state, and the general price level in the economy. In the structure of aggregate demand we can distinguish:
*consumption C (C - from English. consumption - consumption) - demand for consumer goods and services;
*investments I (I - from English. investment - investments) - demand for investment goods;
government procurement G (G - from the English government - government) - demand for goods and services from the state;
*net export X„ - the difference between foreigners’ demand for domestic goods (exports) and domestic demand for foreign goods (imports).
Aggregate demand is equal to the total amount of demand for final products:
AD = C + I + G+X P
The aggregate demand curve AD (from English aggregate demand) shows the quantity of goods and services that consumers are willing to purchase at each possible price level.
The deviation of the AD curve down and to the right is determined three factors: 1) the effect of interest rates; 2) the effect of real wealth; 3) the effect of import purchases.
Interest rate effect assumes that the path of the aggregate demand curve is determined by the effect of a changing price level on the interest rate and hence on consumer spending and investment. Thus, a higher price level, by increasing the demand for money and raising the interest rate, causes a reduction in the demand for the real volume of the national product.
The effect of real wealth or real cash balances of the population manifests itself V that at a higher price level, the real purchasing power of accumulated financial assets with a fixed value (bonds, fixed-term accounts) decreases. In this case, the population will actually become poorer, and therefore we can expect them to reduce their spending.
Effect of import purchases is due to the fact that the volumes of imports and exports of a country depend, among other things, on the ratio of prices in a given country and abroad. All other things being equal, an increase in the price level in a given country will cause an increase in imports and a decrease in exports.
In addition to these price factors, the AD curve is also affected by non-price factors. These include everything that affects consumer spending by households, investment spending by firms, government spending, net exports: consumer welfare, their expectations, taxes, interest rates, subsidies and soft loans to investors, fluctuations exchange rates, conditions for foreign markets etc. Changes in non-price factors are reflected in the graph by a shift in the AD curve. For example, an increase in the supply of money and a corresponding increase in effective demand in the economy will be reflected by a shift of the AD curve to the right.
50. Aggregate supply. Aggregate supply curve. Keynesian, classical and intermediate segments. Non-price factors of aggregate supply.
Aggregate offer- This total final goods and services produced in the economy during the year (volume of real GNP). Higher price levels create incentives to produce more goods and offer them for sale. More low levels prices cause a reduction in the production of goods. Therefore, the relationship between the price level and the volume of national product that firms supply to the market is direct, and this explains the positive slope of the supply curve. Aggregate Supply Curve AS (from English aggregate supply) shows what volume of aggregate output can be offered to the market by producers of goods and services at different meanings the general price level in the economy.
The AS curve consists of three segments or segments:
1Keynesian (horizontal), reflecting the idea of Keynesian theory on the functioning of the economy;
2 intermediate (deviating upward);
3classical (vertical), reflecting the idea of classical theory about the functioning of the economy.
In Keynesian theory, the functioning of the economy is considered over relatively short periods of time. Aggregate supply analysis is based on the following premises:
The economy operates under conditions of underemployment of production factors;
Prices, nominal wages and other nominal values are relatively rigid and respond slowly to market fluctuations;
Real values (output volume, employment, real wages, etc.) are more mobile and react faster to market fluctuations.
The classic segment characterizes the situation in the economy when the national product remains constant at the “full employment level”, and the price level can change.
The intermediate segment of the aggregate supply curve characterizes the situation in the economy when both the real volume of national production and the price level change.
Under influence non-price factors the aggregate supply curve AS itself shifts. Non-price factors are changes in technology, resource prices, taxation of firms, etc. For example, a sharp increase in prices for oil and petroleum products leads to increased costs and a decrease in supply at each given price level V economy, which is graphically interpreted by a shift of the AS curve to the left. A high harvest caused by favorable weather conditions will increase the volume of aggregate supply and will be reflected in the graph by a shift of the AS curve to the right.
Non-price factors have one thing in common: when one or more factors change, changes in unit costs at a given price level. This means that a decrease in unit costs shifts the aggregate supply curve to the right. Conversely, an increase in unit costs shifts the aggregate supply curve to the left.
51. Macroeconomic equilibrium: “AD-AS” model. Change in balance. Shift of the aggregate demand curve and its consequences. Ratchet effect. Consequences of changes in aggregate supply.
The intersection of the aggregate demand and aggregate supply curves determines the equilibrium price level and the equilibrium real volume of national production.
Let us consider how changes in aggregate demand and aggregate supply will affect the macroeconomic equilibrium (and therefore the volume of national production, employment and the price level). If demand increases, then in different parts of the aggregate supply curve the macroeconomic equilibrium will have a trace. view.
In the horizontal section, an increase in aggregate demand from AD1 to AD2 will lead to an increase in employment and an increase in the volume of national product from Q1 to Q2, without an increase in prices. In the ascending segment, an increase in aggregate demand from AD2 to AD3 will lead to an increase in the production of the national product from Q2 to Q3 and an increase in prices to P3, as employment grows and unused capacity begins to be used. An increase in demand in the classic (vertical) segment from AD4 to AD5 will only affect the price level, increasing them from P4 to P5, since production capacity and work force fully used.