Costs for Firms
FC - Fixed Costs - Costs that do not change depending on output, e.g Rent
VC - Variable Costs - Costs that change depending on output, e.g Raw materials
TC - Total Costs = FC + VC
AC (ATC) - Average Cost \(= \frac{TC}{Output}\)
MC - Marginal Costs - Cost for an extra unit of output
Revenue
AR - Average Revenue \(= \frac{TR}{Output}\)
MR - Marginal Revenue - Addition to revenue per extra unit produced
TR - Total Revenue \(= Output \times Price = AR\)
| Output | FC | VC | TC | AFC | ATC | MC | TR | AR | MR |
|---|---|---|---|---|---|---|---|---|---|
| 0 | 60 | 0 | 60 | 0 | 0 | 50 | 0 | 0 | 60 |
| 1 | 60 | 50 | 110 | 60 | 110 | 30 | 60 | 60 | 60 |
| 2 | 60 | 80 | 140 | 30 | 70 | 25 | 120 | 60 | 60 |
| 3 | 60 | 105 | 165 | 20 | 55 | 47 | 180 | 60 | 60 |
| 4 | 60 | 152 | 212 | 15 | 53 | 73 | 240 | 60 | 60 |
| 5 | 60 | 225 | 285 | 12 | 57 | 105 | 300 | 60 | 60 |
| 6 | 60 | 330 | 390 | 10 | 65 | N/A | 360 | 60 | N/A |
Productive Efficiency at Q
Average Costs decrease as quantity increases, but then increase again due to the Law of Diminishing returns, as shown in the table
Law of Diminishing Returns
Additional variable factors of production such as Labour after an optimal point will lead to decreasing marginal returns.
In the table, this begins at an output level of 3, and in the diagram, the optimal point is beyond Q (productive efficiency)
This is because after an optimal point additional workers will get in eachother's way and become less productive.