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Micro Macro Economics Essay

995 words - 4 pages






1. Introduction
2. Determining Profit Maximizing level of output from a table
3. Determining Profit Maximizing level of output from a graph



Costing is an important aspect of production because:

1. By knowing how much it costs to produce an item or to carry out an activity it is possible to price the item or activity
2. It becomes possible to see how much of the total cost of an organisation, production line, or process can ...view middle of the document...

An increase in fixed costs has no effect at all on the variable costs of production. This means that only the average total cost curve shifts. There is no change at all on the marginal cost curve leading to no change in the profit maximizing price and output of a business.

Average fixed costs will fall continuously with output because the total fixed costs are being spread over a higher level of production causing the average cost to fall.

Variable costs

These are costs that vary directly with output since more variable units are required to increase output. Examples are the costs of essential raw materials and components, the wages of part-time staff or employees paid by the hour, the costs of electricity and gas and depreciation of capital inputs due to wear and tear. Total variable cost rises as output increases.

Average variable cost (AVC) = Total Variable Costs (TVC) /Output (Q)

AVC depends on the cost of employing variable factors compared to the average productivity of these factors (usually labor productivity). If additional units of labor can be hired at a constant cost there will be an inverse relationship between average product and average variable cost. Therefore, when average product is maximized, AVC will be minimized.

All these costs are very important, but when deciding how many output to produce we refer to Marginal Cost.

The marginal cost of an additional unit of output is the cost of the additional inputs needed to produce that output. More formally, the marginal cost is the derivative of total production costs with respect to the level of output.

Marginal cost is defined as


Q stands for (quantity of) output and C for cost, so Q stands for the change in output, while C stands for the change in cost.


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