Physical – due to physical exploitation or natural forces
Moral – occurs when new production machines of the same type appear.
Depreciation rates – strictly regulated
Linear depreciation –
Reducing balance, etc.
Production costs of the company in a short period
Fixed costs – FC – costs that are relatively constant for the company and do not change with the volume of production. They include depreciation, interest costs, rents and rents and that part of wages that does not depend on the volume of output.
Variable costs – VC – vary depending on changes in production volumes. By structure, they include costs for raw materials, materials, energy and that part of wages that directly depends on the volume of output. Costs, plans, management and personnel are the usual organizational priorities, reference.
Total costs – TC = FC + VC
Marginal costs – MC – the additional costs that the company incurs for the production of a unit of additional product. They are measured by comparing the increase in total costs to the increase in output. The same result is obtained if we take the increase in variable costs to the increase in output.
MC = lTC / lQ = lVC / lQ
Average total cost – ATC (AC) = TC / Q Measure the average total cost for each unit of product produced
Average variable costs – AVC = VC / Q Show how much is the average variable cost per unit of output
Average fixed costs – AFC = FC / Q Measure how many average fixed costs per unit of product produced
The graphical illustration of the fixed costs is a straight line parallel to the axis Ox, along which the quantities are measured. The graphs of total and variable costs are ascending lines parallel to each other. At smaller values of quantities, they are convex to the O axis after a certain level of production, the law of diminishing returns comes into force and the graphs become concave to the O axis. Graphic illustrations of average variables, average total and marginal costs is U-shaped curves that have this shape under the action of the law of diminishing returns. When this law is activated, the curves of decreasing become increasing, the curve of marginal costs falls first at a minimum and it intersects from bottom to top in the minimum curves of average variables and average total costs. The average fixed cost curve is constantly decreasing and at large production volumes it approaches the abscissa axis.
In the long run, the firm chooses what scale to work with, all its costs are variable on different scales and correspond to different levels of short-term average costs (SAC). If a tangent is passed in the minima of these short-term average costs, it envelops the SAC curves and forms the long-term average cost curve (LAC). The shapes of this curve are determined by 3 sections – decreasing, parallel to the Ox axis and increasing. When a company’s long-term average costs are declining, it is in a state of economies of scale. When long-term average costs increase, the firm derives losses from scale and must stop production. The section in which the curve is parallel to Ox expresses a constant return on scale.
Revenues of the company
Revenue is what is obtained in the sale of the product, it depends on the market price.
Total revenue – is obtained by multiplying the total volume of products sold on the market by market prices. TR = PxQ The goal of the company is to get maximum total sales revenue.
Average income – is obtained by dividing the total by the quantity of realized production. AR = TR / Q
Marginal revenue – the supplement to the total revenue in the realization of a unit of additional volume of production. MR = lTR / lQ. The marginal revenue can also be measured by the slope of the total revenue curve. When the total revenue function reaches a maximum, the marginal revenue is equal to 0.
Profit of the company
The costs that the company incurs can be considered as:
Exploit costs – these are costs that the company incurs to external owners of production factors. There is an supporting document for them and they can be posted.
Implicit costs – these are costs that the company must incur to its owner. These include remuneration for his employment services compensation to its owners such as interest rents and others. There is no justification for them, but they are the alternative price for the entrepreneur to stay in business. The law compensates them through the legally recognized expenses.
Explicit costs are accounting.
Economic costs include the explicit and implicit costs of the firm.
The company’s profit can be considered in two aspects:
Normal profit – these are the implicit costs. They must be at a level that supports the entrepreneur’s interest in the business.
Economic profit (excess, net) – the profit that the entrepreneur receives from the sale when the total income exceeds the total economic costs.
The entrepreneur’s goal is to maximize economic profit. This occurs when the positive difference between total revenue and total costs is maximum when this condition is met and equality between marginal revenue and marginal cost is achieved, which is why MC = MR is called a marginal rule or universal condition for obtaining maximum profit. The entrepreneur, regardless of the market structure, must offer this volume of production, which corresponds to the universal condition.