<< Chapter < Page Chapter >> Page >
Output and total costs
Labor Quantity Fixed Cost Variable Cost Total Cost
1 16 $160 $80 $240
2 40 $160 $160 $320
3 60 $160 $240 $400
4 72 $160 $320 $480
5 80 $160 $400 $560
6 84 $160 $480 $640
7 82 $160 $560 $720

How output affects total costs

The graph shows how costs increase with output.
At zero production, the fixed costs of $160 are still present. As production increases, variable costs are added to fixed costs, and the total cost is the sum of the two.

The relationship between the quantity of output being produced and the cost of producing that output is shown graphically in the figure. The fixed costs are always shown as the vertical intercept of the total cost curve; that is, they are the costs incurred when output is zero so there are no variable costs.

You can see from the graph that once production starts, total costs and variable costs rise. While variable costs may initially increase at a decreasing rate, at some point they begin increasing at an increasing rate. This is caused by diminishing marginal returns, discussed in the chapter on Choice in a World of Scarcity , which is easiest to see with an example. As the number of barbers increases from zero to one in the table, output increases from 0 to 16 for a marginal gain of 16; as the number rises from one to two barbers, output increases from 16 to 40, a marginal gain of 24. From that point on, though, the marginal gain in output diminishes as each additional barber is added. For example, as the number of barbers rises from two to three, the marginal output gain is only 20; and as the number rises from three to four, the marginal gain is only 12.

To understand the reason behind this pattern, consider that a one-man barber shop is a very busy operation. The single barber needs to do everything: say hello to people entering, answer the phone, cut hair, sweep up, and run the cash register. A second barber reduces the level of disruption from jumping back and forth between these tasks, and allows a greater division of labor and specialization. The result can be greater increasing marginal returns. However, as other barbers are added, the advantage of each additional barber is less, since the specialization of labor can only go so far. The addition of a sixth or seventh or eighth barber just to greet people at the door will have less impact than the second one did. This is the pattern of diminishing marginal returns. As a result, the total costs of production will begin to rise more rapidly as output increases. At some point, you may even see negative returns as the additional barbers begin bumping elbows and getting in each other’s way. In this case, the addition of still more barbers would actually cause output to decrease, as shown in the last row of [link] .

This pattern of diminishing marginal returns is common in production. As another example, consider the problem of irrigating a crop on a farmer’s field. The plot of land is the fixed factor of production, while the water that can be added to the land is the key variable cost. As the farmer adds water to the land, output increases. But adding more and more water brings smaller and smaller increases in output, until at some point the water floods the field and actually reduces output. Diminishing marginal returns occur because, at a given level of fixed costs, each additional input contributes less and less to overall production.

Questions & Answers

what is economic
Vida Reply
Economic is a seines which study the human behavior as ends and scarce means which have alternative uses
Debrah
what is special directives
Emmanuel Reply
what is demand
Joseph Reply
Demand simply refers to the amount of goods and services which the consumer is willing and able to purchase at each price
Owusu
what is mean by unitary elastic demand
Bangniyel Reply
demand is said to be unitary elastic when the percentage change in the demand is equal to the percentage change in the price
George
what is the principle of equi-marginal utility
Reliance Reply
what is Economics and it important
Anita Reply
what is production
Anita
what is Economic
Anita Reply
what is the meaning of Economic
Anita
economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
Boso
I don't know.
natchanan
u don't
Ssali
@ Boso thanks for the definition ✌
Raewyn
boso u r too much u try
Liambee
ya nyc
Ssali
Thanks kk
Anita
pls can I ask more questions
Anita
what is production
Anita
production is creation of goods and services
George
what is macroeconomics and microeconomics
Anita
macroeconomics deals with larger economic units such as GDP,GNP,employment while microeconomics deals with smaller economic units such firm and household
George
Thanks
Anita
Explain the ff Scarcity Ends Demand Supply Choice Scale of preference
Anita
macroeconomics deals with larger economic units such as GDP,GNP,employment while microeconomics deals with smaller economic units such firm and household
George
Gross Domestic product...it represent the total value of the products produced within the country including foreign industries
George Reply
what is products
Anita
what are the favourable demand
Odia Reply
list of climate that affect demands
Odia
What is two major forms of international trade?
Musa Reply
What is Economics and why it is important
Abdul Reply
De ans,Economics is the study of women behavior as a relationship between end and scared mean which have alternative uses.
Anita
What is Inflation
Abdul Reply
More money = more consumers, more consumers = lessen the product, less product = high price, high price = inflation
TuroN
is it definition
Odia
why price and quantity increase
Otuu Reply
condition under which price and quantity will be increased at the same time
Otuu
factors that hinders mobility of labour
Dennis Reply
what is scarcity
Adams Reply

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask