Supply of Decision : Cost Production

 Costs and Inputs 

1. The Productivity of the Factors.

•  The greater their physical productivity, the smaller will be the quantity of them required to produce a given level of output, and hence the lower will be the cost of that output. 

2. The Price of the Factors.

•  The higher their price, the higher will be the costs of production

• In the short run, some factors are fixed in supply. Their total costs, therefore, are fixed, in the sense that they do not vary with output. ➢E.g. Rent on building is a fixed cost.

 • The total cost of using variable factors, however, does vary with output. The cost of raw materials is a variable cost. The more that is produced, the more raw materials are used and therefore the higher is their total cost.

Fixed Cost Total costs that do not vary with the amount of output produced. 

TC = TVC + TFC 

Variable Cost Total costs that do vary with the amount of output produced.

 Total Cost The total cost (TC) of production is the sum of the total variable costs (TVC) and the total fixed costs (TFC) of production

Average Cost Average cost (AC) is the cost per unit of production. AC = TC/Q 

Average cost can be divided into the two components: fixed and variable. 

Average Fixed :  Cost Total fixed cost per unit of output AFC = TFC/Q

Average Variable :  Cost Total variable cost per unit of output AVC = TVC/Q

Average Total Cost :  Total fixed cost per unit of output Total cost (fixed plus variable) per unit of output 

AC = TC/Q = AVC + AFV

Marginal Cost Marginal cost (MC) is the extra cost of producing one more unit (i.e. the rise in total cost from increasing output or supply by one unit) 

MC = ΔTC ΔQ 

• Note that all marginal costs are variable, since, by definition there can be no extra fixed costs as output rises. 

• Extra cost of producing one more unit MC curve shape follows from law of diminishing returns: 

➢as more of the variable factor is used, extra units of output cost less than previous units, MC falls