Minimum government intervention in the economy.
CHARACTERISTICS OF MARKET ECONOMY
ESSENCE AND GOALS OF STATE REGULATION OF THE MARKET ECONOMY.
Ticket 8
Market economy – This is an economic system based on the principles of free enterprise, diversity of forms of ownership of the means of production, market pricing, contractual relations between economic entities, and limited government intervention in economic activities. It is inherent in socio-economic systems where there are commodity-money relations.
Having emerged many centuries ago, the market economy reached a high level of development, became civilized and socially limited.
Main features of a market economy:
The basis of the economy is private ownership of the means of production;
Diversity of forms of ownership and management; Free competition; Market pricing mechanism;
Self-regulation of a market economy Contractual relations between economic entities;
Main advantages:
Stimulates high production efficiency;
Fairly distributes income based on labor results;
Does not require a large control apparatus, etc.
Main disadvantages:
Increases social inequality;
Causes instability in the economy;
Indifferent to the damage that business can cause to people and nature, etc.
The market economy of free competition developed in the 18th century, but a significant part of its elements entered the modern market economy.
The main features of a market economy of free competition:
private ownership of economic resources;
market mechanism for regulating the economy based on free competition;
a large number of independently operating sellers and buyers of each product.
The modern market economy (modern capitalism) has proven to be the most flexible; it is capable of restructuring and adapting to changing internal and external conditions. Its main features:
variety of forms of ownership;
development of scientific and technological progress;
active influence of the state on the development of the national economy.
2. ECONOMIC CONTENT OF COSTS.
Each enterprise, before starting production, determines how much income it can receive. The amount of income of an enterprise depends on two indicators: the price of the product and the costs (costs) of its production.
Production costs are the costs associated with the production and circulation of goods, i.e. costs necessary to carry out the production process and sale of products.
In economic theory, many scientists believe that costs can be divided into:
costs of society - the totality of social necessary costs labor for the production of one type of product at an average level of production (average productivity and labor intensity, average level of equipment and technology, etc.);
enterprise costs - the sum of the costs of a particular enterprise for the production and sale of a certain type of product.
In recent years, in modern economic literature, many academic economists divide costs into internal (implicit) and external (explicit).
Internal (implicit) costs are costs equal to cash payments that can be received by an enterprise for its own independently used economic resources, including entrepreneurship. These (opportunity) costs are not always clearly visible, but it is advisable to take them into account when making decisions. management decisions. Opportunity costs are expressed in the value of other goods that could be produced if the same resources were used in the most profitable of all possible ways. Implicit are the costs of using resources owned by a given enterprise. Thus, for the owner of capital, implicit costs can be expressed by the profit that he could receive by investing his capital not in “his own”, but in some other business. Internal costs are unpaid costs, opportunity costs of own resources used in a given production.
External (explicit) costs are the costs that an enterprise incurs when paying for economic resources that belong to external entities that are not related to the owners of the enterprise (firm). Cash expenses for labor costs, the purchase of raw materials and supplies, depreciation of fixed assets, payment of transportation costs, etc. constitute the explicit costs of the enterprise. Since they are calculated on the basis of financial statements, they are called accounting. Accounting (actual) costs are the real costs of an enterprise associated with the direct implementation of production and commercial activities.
Economic costs are a combination of explicit and implicit costs.
The total cost of producing a particular type of product consists of many types of costs, which are usually divided into two large groups: fixed and variable.
1. Fixed costs (FC) - These are costs that do not depend on the volume of output, and their value does not change depending on changes in production volume. They occur when production has not yet begun. Yes, before we start production activities The enterprise must have at its disposal factors of production such as buildings, machines, and equipment. These include rent, administrative and management expenses, depreciation of fixed assets, insurance premiums, travel expenses, etc.
2. Variable costs (VC)- These are costs that vary depending on the volume of production. These include the cost of purchased basic and auxiliary materials, energy costs, wages of main workers, transport services, maintenance of company personnel, etc. When there is no output, variable costs are zero, but as output increases, they increase again.
3.Gross costs (TC)-the sum of fixed and variable costs at each specific level of production.
In a real household. In practice, gross costs initially grow quickly with an increase in production volumes, then their growth rates decrease, so the curve of fixed and variable costs looks as shown in Fig. 11.1.
The manufacturer is interested in knowing the value not so much of total costs as of average ones, since an increase in total costs may conceal a decrease in average costs.
Average costs (ATC) are equal to the quotient of total costs divided by the volume of output:
Marginal costs (MC) are defined as additional. production costs for each new additional unit of production:
Marginal cost shows how much it would cost the firm to increase output per unit.
Marginal costs have a decisive influence on the firm's choice of production volume. This is an indicator that the company can influence. For each level of production there is a special, different meaning.
In the short run, fixed costs do not affect the level of marginal costs - the latter are influenced only by variable costs. Over the long term, marginal costs may rise, remain constant, or fall (depending on economies of scale and other factors).
The concepts of “costs”, “output”, “firm activity” are interpreted quite broadly in modern economic science. Under costs refers to everything that the manufacturer (company) purchases for use in order to achieve the desired result. Release can be any good (product or service) produced by a firm for sale. Activities of the company can refer to both production and commercial activities, for example, transportation, storage and even the purchase of products for the purpose of their subsequent resale.
Each manufacturer strives to increase profits, to achieve greater profitability, or profitability, of its production. Profit is “sandwiched” between two variables: the level of production costs and the price level. The higher the prices and lower the costs, the higher the profitability of production, the greater the profit from it. This means that it is necessary, as Hayek writes, to produce the “right” (those in demand) things in the “right” (most efficient) ways.
Therefore, any company, before starting production, must clearly understand what profit it can expect. To do this, she will study the demand and determine at what price the products will be sold, and compare the expected revenues with the costs to be incurred.
There are two main ways to increase business profitability:
Investing capital in the most profitable areas of the economy;
All-round reduction of production costs, i.e. cost.
Production costs are the totality of material and labor costs for the production of products. They act as an economic category that reflects, firstly, the relationships that arise between subjects within an enterprise regarding the use of living and embodied labor; secondly, these are relationships that arise outside the enterprise between enterprises that supply materials, fuel, etc., enterprises that use these products as raw materials for their production. Costs always take quantitative expression and are considered through a system of natural and cost indicators.
The costs of an enterprise must always be the object of constant management, or in this process the requirements of economic laws must be used.
So law of value demands that the value of goods be based not on individual, but on social production costs.
Law increasing labor productivity requires that constant productivity growth be ensured, otherwise the competitiveness of products is unthinkable.
Firm cost structure . Cost structure defines them internal organization and structure. It is customary to distinguish general or total costs as the main structural elements of costs; average or unit, fixed and variable, marginal and sunk costs.
Total firm costs equal to the sum of the costs of production and marketing of products of a certain type.
Average or unit costs determine the costs per unit of output.
Marginal cost- These are related to the production of one more unit of production.
Sunk costs– one-time costs that cannot be returned back, since they are not taken into account in the price of the product.
Explicit (external) and alternative (imputed) costs. Explicit costs include all the firm's costs for paying for the factors of production used, or all the firm's explicit costs ultimately come down to the reimbursement of the used factors of production. This includes payment for labor in the form of wages, land - in the form of rent, capital - in the form of expenses for fixed and working capital, as well as payment for the entrepreneurial abilities of the organizers of production and sales. The sum of all explicit costs acts as the cost of production, and the difference between the market price and the cost acts as profit. Explicit costs (also called external costs) are monetary payments for resources received from outside. It is these costs that are taken into account by accounting, which is why they are often called accounting costs.
However, not all productive resources are actually paid for. The enterprise can use some of them “for free”. For example, the owner of the land does not pay rent, however, by cultivating the land on his own, he thereby refuses to rent it out and the additional income arising in connection with this. An entrepreneur who has invested his money in production cannot put it in a bank and receive bank interest.
Therefore, the amount of production costs, if only explicit costs are included in them, may be underestimated, and profit accordingly overestimated. For a more accurate picture, so that the company’s decision to start or develop production is justified, costs should include not only explicit, but also implicit (imputed, alternative, internal) costs. Implicit (alternative) costs are called opportunity costs. use of resources owned by the company.
If a firm refuses to use its own factors of production in alternative options, then its implicit costs are estimated as the sum of the maximum lost income from factors of production in the best of the rejected options. For example, if the owner of a company is also its manager, he uses equity and the premises belonging to him, then the implicit costs of the company include:
Missed wages, which he could receive in another company as an employee;
Overlooked rental income, which he could receive,
Renting your own premises;
Overlooked interest income on the equity he could have had by putting the money in the bank;
Overlooked business income, i.e., the profit that he could receive in any industry by organizing a company there. Normal profit- this is the minimum payment required to retain an entrepreneur in a given industry. It is an element of implicit costs.
For the owner, all costs - explicit and implicit - are alternative, since there are alternative options for using the funds invested in the company. Economic costs(economic cost) represent payments to all owners of economic resources sufficient to divert these resources from alternative uses.
Economic costs = Accounting costs + Implicit costs
Focusing on economic costs, the owner makes a decision on the advisability of the company's activities in a particular industry. In the future, by total costs of the vehicle (total cost) we will understand exclusively economic costs.
Taking into account not only explicit, but also opportunity costs allows you to more accurately determine the company's profit. Economic profit is defined as the difference between gross revenue and all (explicit and opportunity) costs.
Accounting (financial) profit is the difference between the firm's gross income (revenue) and its explicit costs.
In Russian economic practice, the cost category is used to determine production costs. The cost price reflects in monetary form the current costs of production and sales of products, includes the cost of consumed means of production, funds for wages, indirect costs of the enterprise and sales costs. The cost does not include: one-time expenses, costs not related to production, fines, penalties, expenses from natural disasters, etc. There are production costs, full costs, and commercial costs.
To assess the level of efficiency of an enterprise, the profitability indicator is calculated, characterizing the profitability or unprofitability of an enterprise for a certain period of time.
Direct and indirect (overhead) costs. Direct costs- These are costs that can be completely attributed to the product or service. These include: the cost of raw materials and supplies used in the production and sale of goods and services; wages workers (piecework) directly involved in the production of goods; other direct costs (all costs that are in one way or another directly related to the product).
Indirect (overhead) costs- these are costs that are not directly related to a particular product, but relate to the company as a whole. They include: costs of maintaining the administrative apparatus; rent; depreciation; interest on loan, etc.
The total amount of economic costs incurred by a business entity for the production of a specific type of product consists of many types of costs, which are usually divided into two large groups: constant and variable (Table 1). This is a classification of costs based on their elasticity to the volume of activity.
Table No. 1. Structure of economic production costs
1. Fixed costs (FC) - costs, the value of which in the short term does not change with an increase or decrease in production volume, i.e. they do not depend on the volume of products produced. They occur when production has not yet begun. Yes, before we start economic activity- the enterprise must have at its disposal such factors of production as buildings, machines, and equipment.
2. Variable costs (VC) - costs, the value of which varies depending on the increase or decrease in production volume, i.e. they depend on the volume of products produced. These include the cost of purchased basic and auxiliary materials, costs of electricity, fuel, wages of main workers, transport services, maintenance of most of the company’s personnel, etc. When there is no output, variable costs are zero, but as output increases, they increase again.
In the initial period of production, variable costs grow at a higher rate than the output produced. As production reaches optimal levels, relative savings occur.
3. Gross costs (TC) are the sum of fixed and variable costs at each specific level of production.
In practice, when analyzing costs, their distribution depending on production volumes allows:
Conduct break-even analysis and product range;
Analyze changes in profitability when operating conditions and sales change;
Assess the level of business risk;
Optimize the volume of activities, profits and costs taking into account demand.
To understand the essence of costs, their role in production activities and the mechanisms of influence on the institution of costs, it is necessary to study the variety of their types. It is the classification of existing costs that reflects their functions and purpose. In addition, costs as a complex economic phenomenon cannot be characterized from the perspective of any one classification.
The classification of enterprise costs is carried out according to various criteria; the item of expenditure, the behavior of costs over different time periods, and the purpose of costs in relation to the enterprise management system are important.
By their essence, costs are divided into two main types - current and one-time. Current costs are associated with the purchase of goods, their transportation, storage and sale, maintenance of material and technical base, and maintenance of personnel. Current costs of commercial activities are usually called distribution costs. They are present wherever commercial activities are carried out, that is, in industry, when it comes to supply and distribution costs, in wholesale and retail trade etc. In other words, these are the costs of material, monetary and labor resources of industrial organizations or trading enterprises when bringing goods from the manufacturer to the consumer.
One-time costs (investments) are one-time costs that do not occur periodically. They are related to the construction, reconstruction or acquisition of facilities, machinery, mechanisms and equipment, intangible assets, etc.
Economists use several approaches to the interpretation of costs and their analysis. For a long time, the fundamental theory of costs was the theory developed by Karl Marx, which considered costs from the perspective of the labor theory of value. He divided all circulation costs by economic nature into pure and additional.
Net distribution costs include part of the costs associated with the purchase and sale of goods, i.e. These are the costs of maintaining sales agents, costs of advertising events, control and accounting of the circulation process, losses, etc. Net distribution costs do not increase the cost of goods and are reimbursed after the sale of goods from profit.
Additional (heterogeneous) costs of circulation are the costs associated with the continuation of the production process in the sphere of circulation. Additional distribution costs are the costs of packaging and packing products, transporting goods, and transforming the production assortment into a consumer one. This type of cost is close to production costs and, when included in the cost of goods, increases the latter. Additional distribution costs after the sale of goods are reimbursed from the proceeds received.
The Marxist theory of distribution costs in modern conditions has lost its practical significance, since the author did not take into account the market situation, abstracted from the problem of price fluctuations around value, etc.
Modern economic theory uses other approaches to the interpretation of costs. First of all, it should be noted that a significant part of the work considers the economic category of “production costs”, but it should be understood in a broad sense, since we are talking about costs used for production and sales activities. Explaining the essence of production costs, the authors illustrate the theory of the issue with examples from the activities of both manufacturing and trading enterprises. Many economists have abandoned the use of the terms "distribution costs" and "production costs", replacing them with the terms "firm costs", "firm costs" or shorter ones - "costs", "costs".
It seems appropriate to the author, when speaking about terminology in the theory of costs, to pay attention to the opinion of V.K. Kondrashova and O.G. Isaeva. These experts define costs as “the value expression of costs not so much for the production and sale of products, but for the functioning of the enterprise, for any activity of the enterprise: possible, productive, unproductive, for inaction, for the creation of capital, for its use." In their work, economists also justify the importance of the classification of costs in their research: “to reveal, show the multidimensionality, diversity of signs and types of costs, their nature - this means to see, understand what was previously unknown and remained invisible, uncertain, unused, unmanifested. The completeness of costs as a basic principle - this is the significance and novelty of the work on the classification of costs” [Ibid].
So, below we will consider the classification of the cost system in order to determine them, isolate them from the production process, further analyze and find the most optimal options managing these costs.
1. Role in the management system:
· production costs(related to the manufacture of goods, the activities of the enterprise);
· non-production (company-wide) costs (related to sales, promotion of products to consumers).
2. Attitude to the production (technological, trade) process:
· basic expenses (costs without which the product will not be manufactured, for example, the cost of workers' wages, the cost of materials that are part of the product, etc.);
· overhead costs (usually these are indirect, complex costs, they contribute to a better production process and sales of products, but products can be manufactured without these costs (for example, the cost of salaries of management personnel).
3. Method of attribution to cost (cost intensity):
· direct costs (determined precisely for a given volume of production, for example, the cost of workers' wages, the cost of materials);
· indirect (indirect) costs (usually overhead, complex costs, they are distributed by type of product, by volume, by workshop in proportion to the selected (specified in the instructions) distribution base (buyer).
4. Possibility of plan coverage:
· planned (standardized) costs;
· unplanned costs.
5. Expediency in spending resources:
· productive (useful) costs;
· unproductive (useless, unnecessary, idle) costs.
6. Composition of costs:
· single-element (homogeneous costs, for example only for wages);
· complex (costs that are complex in composition, usually these are overhead, indirect costs or complex cost items: general workshop, general plant).
7. Compulsory compensation
· repayable (costs returned from income, these are the bulk of costs);
· sunk (costs that will never be able to generate profit or pay off, for example, costs of unfinished and unnecessary construction);
8. According to the degree of restriction
· limited (expenses for which a maximum value is set, for example a limit on electricity, on wages);
· normalized (there is a set amount of costs, for example, for wages in hours, tariff rates);
9. By type of market
market costs finished products;
· labor market costs;
· costs of production resource markets;
· costs of the financial market, securities market
10. Place of cost occurrence (responsibility centers). Costs for commercial activities are divided by areas of activity (for example, logistics, sales) and by corresponding organizational and structural units - enterprises (manufacturing or trading type).
11. Specific types of costs
Based on this criterion, individual cost items (distribution costs) are identified, the totality of which constitutes their nomenclature. For industrial enterprises no nomenclature of costs for commercial activities has been developed, while for trade and catering Russia currently has a unified nomenclature, including 14 cost items.
The nomenclature of distribution costs is a set of costs broken down by individual items. The list of items of distribution costs is established by the enterprise independently in accordance with clause 4 of Article 252 of the Tax Code of the Russian Federation. In this case, it is possible to use the nomenclature from the main articles recommended Methodical instructions on accounting for costs included in distribution and production costs, and financial results at trade and public catering enterprises, approved by Roskomtorg and the Ministry of Finance of Russia. The distribution costs include the following items:
· transportation costs;
· labor costs;
· contributions to insurance funds;
· expenses for rent and maintenance of buildings, structures, premises, equipment and inventory;
· depreciation of fixed assets;
· expenses for repairs of fixed assets;
· wear and tear of sanitary and special clothing, table linen, dishes, and cutlery;
· costs of fuel, gas and electricity for production purposes;
· expenses for storage, part-time work, sub-sorting and packaging of goods;
· loss of goods and technological waste;
· packaging costs;
· other expenses.
An enterprise can reduce, by combining individual items, or expand, by separating individual items from other expenses, the range of distribution costs. When constructing the accounting nomenclature of expense items, the features of the economic and financial activities of the enterprise are taken into account.
Russian entrepreneurs in their activities use a significant part of the classifications considered, but, unlike their foreign colleagues, they do not sufficiently use the division into constant and variable to manage costs.
The circulation costs of commercial intermediary organizations have been studied in sufficient detail, and methods for managing them have been developed and practically applied. Few studies focus on business costs manufacturing enterprises. Supply costs and distribution costs have been studied primarily in isolation, with more attention paid to the problem of identifying and optimizing distribution-related costs.
One of the reasons for this situation is the underestimation of the role of commodity-money relations in production activities until Russia’s transition to market economy, lack of due attention to the problem of cost optimization and studying their economic nature. In this regard, the basis and experience of managing costs for domestic enterprises compared to foreign business only accumulates and is comprehended. This experience is yet to become the basis for scientific developments and innovations in the field of cost management.
It is also necessary to highlight the types of costs, the consideration of which in economic science began not so long ago. The author considers it necessary to dwell on logistics costs, as well as transaction costs.
Logistics costs are also called marketing costs. Since logistics deals with the management and optimization of material, financial and information flows, based on the application modern technologies, progressive economic solutions, logistics costs represent expenses aimed at achieving these objectives. This type of costs should be distinguished and separated from the costs of commercial activities, because the use of the term “logistics costs” can only be applied to costs arising in connection with the development of new products, marketing research, performing tasks for the rational organization of loading and unloading operations, transportation, and functioning of the coordinating service. At the same time, the use of methods and levers of marketing and logistics can qualitatively change the structure and amount of costs for commercial activities.
Logistics costs include:
Procurement costs (costs of placing an order, concluding a contract, etc.);
Inventory holding costs (costs for warehousing products, rental payments);
Losses due to unavailability of goods (costs due to non-fulfillment of an order, cost of lost sales, costs due to loss of a customer);
Transport costs (losses during the process of transporting products).
Transaction costs are the most important concept in institutional economics. Institutional economics studies the behavior of participants economic activity, factors influencing the conclusion of contracts. Thus, transaction costs are the costs arising in connection with the conclusion of agreements by economic entities; this is “the value of resources (money, time, labor, etc.) spent on planning, adaptation and ensuring control over the fulfillment of obligations undertaken by individuals in the process of alienation and appropriation of property rights and freedoms accepted in society."
According to Dalman K., the following transaction costs are distinguished:
· costs of obtaining and analyzing information data;
· costs of negotiations and decision-making;
· control costs;
· costs of legal protection of the execution of a contract using the market.
Without understanding the essence of transaction costs, it is impossible to understand the operation of the economic system.
advance costs labor resource
Any company, before starting production, must clearly understand what profit it can expect. To do this, she will study demand and determine at what price the product will be sold, and compare the expected revenues with the costs to be incurred.
“In microeconomics, the term “income” means sales revenue.
Let's consider the company's costs in the process of production and marketing of goods and services. First of all, let's pay attention to explicit and alternative (imputed) costs, since both are taken into account by the company in its activities. Explicit costs include all the firm's costs of paying for the factors of production used. The classic factors of production are labor, land (natural resources) and capital. Modern economists tend to single out entrepreneurial abilities as a special factor. One way or another, all the firm's explicit costs ultimately come down to reimbursement of the used factors of production. This includes payment for labor in the form of wages, land - in the form of rent, capital - in the form of expenses for fixed and working capital, as well as payment for the entrepreneurial abilities of the organizers of production and sales. The sum of all explicit costs acts as the cost of production, and the difference between the market price and the cost acts as profit.
However, the amount of production costs, if they include only explicit costs, may be underestimated, and the profit will accordingly be overestimated. For a more accurate picture, so that the company’s decision to start or develop production is justified, costs should include not only explicit, but also implicit (imputed, alternative) costs.
Alternative are called the costs (opportunity cost) of using resources that are the property of the company. These costs are not included in the firm's payments to other organizations or individuals. For example, the owner of the land does not pay rent, however, by cultivating the land on his own, he thereby refuses to rent it out and the additional income arising in connection with this. A self-employed worker is not hired by a factory or paid there. Finally, an entrepreneur who has invested his money in production cannot put it in a bank and receive loan (bank) interest.
Taking into account not only explicit, but also opportunity costs allows for a more accurate assessment of the company's profit. Economic profit is defined as the difference between gross revenue and all (explicit and opportunity) costs.
Example 10.1. You have decided to renovate your apartment yourself. Your costs will be the cost of wallpaper, paint, glue, etc. However, by renovating an apartment for several days, you refuse another job where you could receive wages (for example, you took a leave of absence from work at your own expense). The structure of your costs will look like this, rub.:
Obviously, if a repair company for the same work (without the cost of materials) requires less than 3,000 rubles, then you will prefer to go there, and if it is more than this amount, you will repair the apartment yourself.
By distinguishing between explicit and opportunity costs, we can determine what is meant by profit in accounting. Accounting profit(financial profit) is the difference between the firm's gross income (revenue) and its explicit costs. In practice, as a rule, a manager is faced with precisely this type of profit.
The division of costs into explicit and alternative is one of their possible classifications. There are other types of classification, such as dividing costs into direct and indirect (overhead), fixed and variable.
Direct costs- These are costs that can be completely attributed to the product or service. These include:
. the cost of raw materials and supplies used in the production and sale of goods and services;
. wages of workers (piecework) directly involved in the production of goods;
. other direct costs (all costs that are in one way or another directly related to the product).
Indirect (overhead) costs- these are costs that are not directly related to a particular product, but relate to the company as a whole. They include:
. expenses for maintaining the administrative apparatus;
. rent;
. depreciation;
. interest on loan, etc.
The criterion for dividing costs into fixed and variable is their dependence on production volume.
Fixed costs FC (English fixed costs) are costs that do not depend on production volume.
Variable costs VC (English variable costs) are costs that depend on production volume. Direct costs of raw materials, materials, labor, etc. vary depending on the scale of activity. Overhead costs such as reseller commissions, telephone charges, stationery, increase with business expansion, and therefore in this case belong to the category of variable costs. However, for the most part, the direct costs of the company are always classified as variable, and overhead costs are classified as fixed (Fig. 10.1
Fig. 10.1. Relationship between two types of cost classification
The sum of fixed and variable costs is gross, or total, costs of the TS company (eng. total costs).
Dividing costs into fixed and variable implies a conditional separation of short-term and long-term periods in the company's activities. By short-term we mean such a period in the operation of a company when part of its costs are constant. In other words, in the short term the company does not buy new equipment, does not build new buildings, etc. In the long run, it can expand its scope, so in a given period all its costs are variable.
Under average refers to the firm's costs of producing and selling a unit of goods. Highlight:
. average fixed costs AFC (average fixed costs), which are calculated by dividing the firm's fixed costs by production volume;
. average variable costs AVC (English average variable costs), calculated by dividing variable costs by production volume;
. average total costs or the total cost per unit of an ATC product (average total costs), which are defined as the sum of average variable and average fixed costs or as the quotient of gross costs divided by output volume.
Example 10.2. Let's calculate average costs based on the data given in 10.1
Table 10.1. Fixed, variable, gross and average costs of the company
We see that average gross costs decrease with increasing production volume. This happens because as production expands, the firm's fixed costs are allocated to more and more products, making them cheaper.
Average variable and average gross costs may behave differently as production volume increases. In our example, average variable costs are the same for volumes from 100 to 300 units; with further expansion of production (up to 600 units), they increase. Average gross costs decrease as volume increases to 400 units, and then increase.
Factors of production must be used by the company in compliance with a certain proportionality between constant and variable factors. You cannot arbitrarily increase the number of variable factors per unit of constant factor, since in this case the law of diminishing returns(see 2.3).
According to this law, a continuous increase in the use of one variable resource in combination with a constant amount of other resources at a certain stage will lead to the cessation of increasing returns, and then to their decrease. Often, the law assumes that the technological level of production remains unchanged, and therefore the transition to more advanced technology can increase returns regardless of the ratio of constant and variable factors.
Let us consider in more detail how the return from a variable factor (resource) changes in the short-term time interval, when part of the resources or factors of production remains constant. After all, for a short period, as already noted, the company cannot change the scale of production, build new workshops, purchase new equipment, etc.
Let us assume that a company in its activities uses only one variable resource - labor, the return of which is productivity. How will the firm's costs change as the number of workers it hires gradually increases? First, let's look at how output will change as the number of workers increases. As the equipment is loaded, product output quickly increases, then the increase gradually slows down until there are enough workers to fully load the equipment. If we continue to hire workers, they will no longer be able to add anything to the volume of production. Eventually there will be so many workers that they will interfere with each other, and output will decrease.
The increase in production due to an increase by one unit in the amount of a variable factor is called marginal product this factor. In the example under consideration, the marginal product of labor MP L (marginal product) will be the increase in production volume due to the attraction of one additional worker. In Fig. 10.2 shows the change in the volume of output with an increase in the number of workers L (English labor). As can be seen from the graphs, production growth is rapid at first, then gradually slows down, stops, and finally becomes negative.
However, in its activities, a company primarily faces not the amount of resources used, but their monetary value: it is not interested in the number of workers hired, but in wage costs. How will the firm's costs (in this case, labor costs) change for each additional unit of output?
Rice. 10.2. Law of diminishing returns. Dynamics of output with an increase in the number of workers (a) and dynamics of the marginal product (b):Q - output volume; L is the number of workers; MRL is the marginal product of labor
The increase in costs associated with the release of an additional unit of production, i.e. The ratio of the increase in variable costs to the increase in production caused by them is called the marginal costs of the company MC (marginal costs):
where sVC is the increase in variable costs; sQ is the increase in production volume caused by them.
If, with an increase in sales volume by 1OO units. of goods, the firm's costs will increase by 800 rubles, then the marginal costs will be 800: 100 = 8 rubles. This means that an additional unit of goods costs the company an additional 8 rubles.
As production and sales volumes increase, the firm's costs may change:
a) evenly. In this case, marginal costs are a constant value and are equal to variable costs per unit of goods (Fig. 10.3, A);
b) with acceleration. In this case, marginal cost increases as production volume increases. This situation is explained either by the action of the law of diminishing returns, or by the rise in prices of raw materials, materials and other factors, the costs of which are classified as variables (Fig. 10.3, b);
c) with slowdown. If the company's expenses for purchased raw materials, materials, etc. decrease as output increases, marginal costs decrease (Fig. 10.3, V).
Rice. 10.3. Dependence of changes in firm costs on production volume
Let's take a closer look at the effect of the law of diminishing returns on a firm's marginal costs. Let us assume that the variable is one factor—labor. Let us determine how a change in the return from the employed workers will affect the firm's costs when the volume of output increases.
Let's assume that hiring each worker costs the company 1 thousand rubles. In our example, one worker is not able to produce any product at all, two workers can produce 5 units, three workers can produce 15 units. etc. (Table 10.2).
The company will not hire the eighth and ninth workers, since the eighth will not be able to provide an increase in production, and the ninth will simply interfere, and production will decrease. Therefore, the company will either decide to expand production space, which will allow the efficient use of additional workers, or limit itself to hiring two to seven workers at existing facilities. However, it is impossible to answer the question of how many specific workers will be hired, because there is no information about the demand for the product and the company’s income from its sale.
Table 10.2. Costs and output for one type of variable resources
Number of workers, people |
Product output, units |
Costs, thousand rubles |
|
for payment of wages |
limit |
||
We assumed that only one type of resource is variable - labor force. However, in practice, a firm faces several variable resources. To expand production, it needs more raw materials, materials, energy, etc. Some of its costs will remain constant: rent, insurance premiums, the cost of the equipment used. In the short run, when costs can be divided into fixed and variable costs, the law of diminishing returns will apply.
In table Table 10.3 shows data on the company’s costs: fixed, variable, marginal and average.
Based on the calculations given in table. 10.3, you can build a graph of changes in the average (fixed, variable and gross) costs of the company, as well as marginal costs, depending on changes in the volume of output (Fig. 10.4). The relative position of the curves on the graph is always subject to certain patterns. When the marginal cost curve falls below the average variable cost curve, the latter always has the character of a downward curve, as these costs are reduced.
Table 10.3. Dynamics of company costs in the short term
Rice. 10.4. Family of company cost curves in the short term: C - costs;Q - output volume;AFC - average fixed costs; AVC—average variable costs; ATC - average gross costs; MC - marginal cost
From the moment the marginal cost curve intersects the average variable cost curve (point A), average variable costs begin to increase. The same pattern exists for the marginal and average gross cost curves: the marginal cost curve intersects the average gross cost curve at the point with their minimum value (point B).
Average variable costs will be minimal at point A when producing 9 thousand units. products (in Table 10.3, the minimum average variable costs are 353.3 rubles). The minimum average gross costs are 436 rubles. in the production of 14 thousand units. products (point B).
When plotting a cost analysis, you should always start by drawing the marginal cost curve. Then you should make sure that it intersects the average variable and total cost curves at their minimum points. These points may not coincide exactly with the data given in the table, since it provides information only for whole units of production, and cost curves may reflect production in fractions of a unit.
Analysis of production costs affects the firm's choice of output volume in the short-term time interval, when some of the costs are constant. For example, how many loaves of bread can a bakery produce with its existing production capacity and equipment? How much grain can be grown on fixed crop areas with the available amount of agricultural machinery?
In the long run, a firm can change all its factors of production. In other words, all costs will act as variables. Analysis of changes in long-term costs is important for choosing a company's strategy in the scope of its activities. For example, is it worth creating one large enterprise or several small ones to produce a given volume of goods? Which option will minimize costs? If the size of the company doubled (a new building was built, new equipment was purchased), in what proportion will the volume of output change? Why do we observe in practice that there are large enterprises in the automotive and metallurgical industries, while clothing production and the service sector are concentrated, as a rule, in small firms?
Let's say our bakery bakes buns. Having analyzed the costs, we came to the conclusion that they would be minimal when producing 1000 buns daily. The average gross cost curve ATC1 is shown in Fig. 10.5. If the bakery produces more buns, its average gross costs will increase.
WITH 
Rice. 10.5. Average costs of the company in the short and long term: ATC1, ATC2, ATC3 - average gross cost curves in the short term: AC - average cost curve in the long term
The effect of the law of diminishing returns can be leveled only by expanding the scale of production, opening a new workshop with new equipment. In this new, larger enterprise (average gross cost curve ATS2) the law of diminishing returns will begin to operate at a larger volume of output, and the minimum cost per bun will be achieved when baking 2000 pcs. daily.
If we continue to expand the enterprise, then the average gross cost curve ATC3 will rise up and the minimum cost when baking 3000 buns will be higher than when baking 2000 buns. Arc AC describing curves ATS1,ATS2,ATS3), will represent a curve of long-term average gross costs at different scales of production. The minimum costs will be when baking 2000 buns daily.
What explains this position of the enterprise's long-term average cost curve? Economists associate it with the so-called positive and negative economies of scale. Economies of scale will be positive if average costs decrease as the size of the enterprise increases, and negative if they increase.
There are many explanations for positive and diseconomies of scale. Economies due to expansion of production scale are caused by the fact that:
. as the size of the enterprise grows, the opportunities to take advantage of specialization in production and management increase;
. Larger enterprises may use high-performance and expensive equipment;
. more opportunities for diversification of activities, development of by-products, production of products based on waste from the main production.
Negative economies of scale arise due to disruption of controllability in an overly large firm:
. the efficiency of interaction between its individual divisions decreases, the company becomes “sluggish”, flexibility is lost;
. it becomes difficult to control the implementation of decisions made by the company’s management;
. in individual divisions local interests arise that contradict the interests of the company as a whole;
. As the size of the firm grows, the costs of transmitting and processing information necessary for decision-making, etc., increase.
Economies of scale manifest themselves differently in individual industries. There are industries where average costs reach a minimum when output is very large, sufficient to satisfy market demand. From the point of view of cost savings, it is advisable for them to have one large company. These are industries of the so-called natural monopoly. Natural monopolies include, for example, electricity, gas and water supply enterprises of a large city. The activities of natural monopolies are regulated by the state.
In some industries, long-term average cost curves first decline quickly and then remain at the same level for quite a long time—horizontal sections. In such areas, the returns to scale of production are constant, and both small and large firms can exist and operate effectively. Examples include enterprises producing clothing, shoes, and shops.
In our example, the optimal size is a plant that produces 2,000 buns daily. If market demand exceeds this amount, it is advisable to create a new enterprise rather than expand an existing one.
The analysis of the company's costs in the short and long term, given above, is a necessary, but not sufficient condition for planning production for the near future and in the future. Minimizing costs is not an end in itself, but only a means of increasing profits or reducing losses, and ultimately, ensuring the stability and sustainability of the company’s position in a market economy.
At the next stage, the company's income, as well as profits and losses in various time intervals are analyzed. Income is a function of the price of goods produced and the volume of production. In some cases, the price of a product is a factor external to the company; in others, the company, based on an analysis of consumer preferences, determines the price of the product itself. Therefore, the analysis of a firm's choice of production volume that provides it with maximum profits or minimum losses begins with a consideration of the conditions that it encounters in the market.
1. There are different types of cost classification. According to one of them, costs are divided into explicit and alternative (imputed). Explicit costs are those associated with the use of factors of production that are not owned by the firm and for which it must pay. to third parties or private individuals. Opportunity costs typically arise when resources owned by the firm itself are used. In this case, the possible benefit from using these resources in a different way on the side is considered as an alternative cost for the company. Taking these costs into account when making decisions about the feasibility of producing a product leads to the concept of economic profit as the difference between the company's revenue and all (explicit and alternative) its costs.
2. In practice, we often come across the division of costs into direct and overhead (indirect), the main criterion of which is the possibility of their attribution to a unit of product. The classification of costs into fixed and variable is based on their dependence (or independence) on output volume.
Fixed costs do not depend on production volume and cannot be changed in a short time. Variable costs vary depending on the quantity of products produced. In this regard, the analysis of a company's costs can be carried out in the short-term (when only variable costs change) and long-term (when all costs can change) time intervals.
3. Changes in costs in the short term are subject to the law of diminishing returns. Its essence is that as the use of any one variable resource in production increases (provided that all other resources are constant), the return on it first increases, and then this growth slows down. As a result, the marginal product (additional output produced by increasing the amount of resource per unit) will begin to decrease at a certain stage, and marginal costs (the increase in costs for each additional unit of output) will begin to increase.
4. The patterns that govern the change in costs in the long-term time interval allow the company to choose the right size of the enterprise. If a company expands production, then at the initial stage there is a positive effect of scale and unit costs are reduced. This occurs due to the advantages of worker specialization, the possibility of using more productive equipment, etc.
However, with a further increase in the size of the enterprise, the effect of scale becomes negative, and average costs increase. Economies of scale in different industries are achieved at different enterprise sizes. In some cases, maximum savings can be achieved when there are several or even one very large enterprise. The activities of firms in industries of the so-called natural monopoly are regulated by the state.
Explicit costs
Alternative (opportunity) costs
Accounting (financial) profit
Direct costs
Indirect costs
Fixed costs
Variable costs
Gross (total) costs
Average costs
Marginal product
Marginal cost
Positive and diseconomies of scale
1. What are the explicit and alternative (imputed) costs of a company?
2. Give examples of a firm's fixed and variable costs. What is the economic meaning of dividing costs into fixed and variable?
3. What principle underlies the distinction between short- and long-term periods in a company’s activities?
4. What is the effect of the law of diminishing returns (increasing marginal costs)?
5. What is marginal cost? What is the relationship between a firm's marginal and average variable costs?
6. Let's assume that you decide to do individual work labor activity— knit and sell sweaters. The cost of wool is 2000 rubles. per month, the knitting machine cost you 6 thousand rubles, but you expect to use it for two years.
Revenue from monthly sales of products is 3,300 rubles, income tax is 30%. You are offered to go to work in a factory (salary 700 rubles per month excluding 12% income tax). Calculate your explicit and opportunity costs, as well as your likely economic profit. What will be your decision: start your own business or go to work in a factory?
7. Calculate and draw the firm’s average (fixed, variable, gross) and marginal cost curves based on the following information:
Number of products, thousand pieces……………. 1 2 3 4 5 6 7 8 9 10
Variable costs, thousand rubles……….. 9 17 24 30 37 45 54 65 78 93
Fixed costs amount to 3 thousand rubles.
8. How will the following changes affect the company’s costs: - increase in rent; increasing employee wages; increase in loan interest; increasing tax rates?
Under costs refers to the totality of costs for an enterprise’s acquisition of resources on the factor of production market. Total opportunity costs include:Explicit costs (external) determined by the market price of factors of production, i.e., the price that the supplier of resources chooses as the best of the alternatives (wages paid to workers); Implicit costs (internal)- opportunity costs of using resources owned by the owners of the company. These costs are not provided for in contracts obligatory for explicit payments, and therefore remain uncollected in monetary form (cash payments, normal profit); Hidden costs do not provide for the transfer of funds as a price for resources. For example, the owner of the equipment, instead of renting out this equipment, uses it in his production activities. Opportunity costs here are rent; Normal profit is the profit that allows capital to be retained in a given area of application (i.e., the price of being in business). Types: Fixed costs– costs, the value of which does not depend on the volume of production (payments, taxes). General costs is the sum of fixed and variable costs. There are: Average total costs equal to the sum of average fixed and average variable costs; Average fixed costs. The higher the productivity per unit of resource, the lower the costs per unit of output will be; General variable costs equal to the sum of all marginal costs. Marginal costs characterize the increase in total costs associated with the production of an additional unit of output. Marginal cost is equal to the difference in variable costs of producing an additional unit of output from the previous value of total variable costs. Internal costs: owner own enterprise or the store does not pay itself a salary, does not receive rent for the building in which the store is located. If the owner invests money in trading, he does not receive the interest that he would have had by putting it in the bank. But the owner of this company receives the so-called “normal” profit. Otherwise, he will not be involved in this matter. The profit he receives constitutes an element of cost. External costs- production costs that the firm shifts to other enterprises or society as a whole; payment for resources to suppliers who do not belong to the owners of this company (wages of hired personnel, payments for raw materials, energy). First of all, these costs relate to environmental pollution, the costs of cleaning which society is forced to bear.
44.Total, average and marginal costs. The "marginal and average cost" rule.
Fixed costs- these are costs, the size of which does not depend on the volume of production of the company (rent, security of the enterprise). (Fig. a) Variable costs- these are costs, the size of which depends on the volume of production of the company (staff wages accrued depending on output, payments for fuel used). They are designated VC. In total, fixed and variable costs form general, or gross costs. They are designated TS: TC = FC + VC.Average costs. To manage production, it is important to know not only the amount of total, fixed and variable costs, but also specific ones, i.e. costs per unit of production. This is the average cost - the cost per unit of production. Average AC costs are calculated by dividing costs by the volume of products produced. This way you can calculate average fixed costs (AFC) and average variable costs (AVC). (Fig. b) Marginal cost - This is the increase in total costs resulting from the production of an additional unit of output. They show the amount of cost that can be saved by reducing production per unit. Average costs do not provide such information. They are designated MS. Marginal and average cost rule– the rule according to which marginal costs must equal average costs when average costs reach their minimum.
