Short term production costs. Costs: concept, types, dynamics

Cost analysis is carried out with the obligatory differentiation of the period into short-term and long-term. The essence of the difference between them lies in the increase in production capacity. In a short time it is impossible to technically re-equip the enterprise, the reconstruction is carried out for a rather long time. Having calculated the production costs in long term and by establishing their dynamics, the economist will be able to determine the firm's strategic paths to maximize profits and minimize costs. But first you need to decide on this economic concept as production costs in the short run.

Production costs in the short run

Production costs of short periods are characterized by the division into fixed and variable. The former do not depend on the size of production, and the enterprise carries them even when the work is stopped. Usually this is rent, depreciation, planned capital repair costs, AUR salary, etc. Variables change due to changes in production volumes. This is the salary of shop personnel, the cost of material and energy resources, the transportation of finished goods.

Differences between cost elements are important to any business because variable costs can be controlled. Permanent ones are not under the control of the company's administration - they are mandatory in any situation. Combining fixed and variable costs creates a gross or total.

The dynamics of production costs in the short term can be traced in a graph that clearly demonstrates the growth production costs due to variable costs with an increase in output:

For a detailed analysis of costs, in addition to the average total costs, the average constant and average are used. variable costs, calculating them as the ratio of the size of the corresponding costs to the output. This is how production costs are determined in the short run. Let's briefly explain what the short run cost analysis shows:

• with an increase in production volumes, the size of average fixed costs gradually decreases, since the constant amount of costs is distributed to an increasing number of issued units;
• average variable costs change based on the law of diminishing returns.

Average total costs are usually needed by the economist to analyze the comparison with the price of the manufactured product. This makes it possible to calculate the amount of profit and determine the ways of the company's development in the near future.

Long-term production costs

Production costs in the short and long run are homogeneous in composition, but the costs in a long time differ in their specificity, since they are interconnected with the scale of production, which can radically change. Here, the main feature of costs is that they are all variable in nature, since all resources can change. For example, a company can increase or decrease capacity, move to another industry, etc. Therefore, the firm's production costs in the long run are not delineated into average constant and average variables, and analysts work with long-term average total costs, which are essentially the average variable costs.

Often, economists resort to dividing the long-term period into many short ones and analyze the dynamics of production costs in the long run by combining data from the analysis of the costs of short-term periods. This method makes it possible for the economist to fix the lowest values ​​of costs for unit of production at any volume of output and determine the necessary factors of production that can be changed. Graphically, it looks like this:

Long-term production costs: economies of scale

The development of production affects costs in different ways. The cost savings characteristic of capacity growth and the increasing return on them due to the outstripping growth in production costs create a positive effect, since the average long-term costs per unit of output in such conditions are noticeably reduced.

However, the positive effect of the growing scale of production is not unlimited. Over time, company expansion can produce negative results if higher output drives higher costs. This happens, for example, with a decrease in consumer demand and a decrease in sales opportunities. The negative effect is characterized by a decrease in the efficiency of the firm and an increase in average costs, therefore, when planning the scale of production, the company should limit the limits of its expansion. Constant returns to scale arises when costs and output are the same in terms of growth.

We have explained that in economics, production costs in the long run are brief, but , Having understood their structure and dynamics, it is easy to explain the importance of these indicators in determining the company's strategy for optimizing production and making a profit.

A short-term period is a period of time too short for a change in production capacities, but sufficient for a change in the intensity of the use of these capacities. Production capacity remains unchanged in the short run, and the volume of output can be changed by changing the quantity work force, raw materials, and other resources used at these facilities. The cost of production of any product depends not only on the prices of resources, but also on technologies - on the amount of resources that is needed for production. We'll look at how the output will change as more and more variable resources are introduced.

Production costs in the short run are divided into fixed, variable, general, average and marginal. Fixed costs (FC) - costs that do not depend on the volume of production. They will always be the case, even if the firm is not producing anything. These include: leases, deductions for depreciation of buildings and equipment, insurance premiums, expenses for overhaul, payment of obligations on bonded loans, as well as salaries of senior management personnel, etc. Fixed costs remain unchanged at all levels of production, including zero. Graphically, they can be represented as a straight line parallel to the abscissa axis (see Fig. 1). It is indicated by the FC line. Variables (VC) - costs that depend on the volume of production. These include the costs of wages, raw materials, fuel, electricity, transport services and similar resources. In contrast to fixed variable costs, they change in direct proportion to the volume of production.

They are plotted graphically as an upward curve (see Fig. 1) indicated by the VC line. The variable cost curve shows that as the output of a product increases, the variable costs of production increase. The distinction between fixed and variable costs is essential for every businessman. The entrepreneur can manage variable costs, since their value changes over the short term as a result of changes in the volume of production. Fixed costs are outside the control of the firm's administration, since they are mandatory and must be paid regardless of the volume of production.

Rice. one.

Total, or gross, costs (total cost, TC) - costs in general for a given volume of production. They are equal to the sum of fixed and variable costs: TC = FC + VC. If you superimpose the curves of fixed and variable costs, you get a new curve that reflects the total costs (see Figure 1). It is indicated by the TC line. Average total (average total cost, ATC, sometimes called AC) is the cost per unit of production, i.e. total costs (TC) divided by the amount of production (Q): ATC = TC / Q. Average total costs are commonly used for comparison with prices, which are always quoted per unit of output. Such a comparison makes it possible to determine the amount of profit, which allows you to determine the tactics and strategy of the company in the near future and in the future. Graphically, the curve of average total (gross) costs is depicted by the ATC curve (see Fig. 2). The average cost curve is U-shaped. This suggests that average costs may be equal to the market price, or may deviate from it. A firm is profitable or profitable if the market price is higher than average costs.

Rice. 2.

V economic analysis in addition to average total costs, concepts such as average fixed and average variable costs are used. This is similar to average total costs, fixed and variable costs per unit of output. They are calculated as follows: average fixed costs(AFC) are equal to the ratio of fixed costs (FC) to output (Q): AFC = FC / Q. Average variables (AVC), by analogy, are equal to the ratio of variable costs (VC) to output (CZ):

Average total costs - the sum of average fixed and variable costs, i.e.:

ATC = AFC + AVC, or ATC = (FC + VC) / Q.

The value of the average fixed costs decreases continuously as the volume of production increases, since a fixed amount of costs is distributed over more and more units of production. Average variable costs change in accordance with the law of diminishing returns. An important factor in determining the strategy of a firm in economic analysis is given to marginal costs. Marginal cost (MC) - costs associated with the production of an additional unit of production. MS can be determined for each additional unit of production by dividing the change in the increase in the sum of total costs by the increase in output, i.e.:

MS = DTS / DQ.

Marginal costs (MC) are equal to the increase in variable costs (DVC) (raw materials, labor), if it is assumed that fixed costs (FC) are unchanged. Therefore, marginal cost is a function of variable costs. In this case:

MS = DVC / DQ.

Thus, marginal costs (sometimes called incremental costs) represent the cost increment resulting from the production of one additional unit of output. Marginal cost measures how much it will cost a firm to increase its output by one unit. Graphically curve marginal cost represents the ascending line MS, intersecting at point B with the curve of average total costs of ATC and point B with the curve of average variable costs AVC (see Fig. 3). Comparison of average variables and marginal costs of production is important information for managing a firm, determining the optimal size of production, within which the firm receives a stable income.

Rice. 3.

From fig. 3 shows that the curve of marginal costs (MC) depends on the value of the average variable costs (AVC) and gross average costs (ATC). At the same time, it does not depend on the average fixed cost (AFC), because the fixed cost FC exists regardless of whether additional production is produced or not. Variable and gross costs rise with output. The rate at which these costs increase depends on the nature of the production process and, in particular, on the extent to which production is subject to the law of diminishing returns with respect to variable factors. If labor is the only variable, what happens when output increases? To produce more, a firm must hire more workers. Then, if the marginal product of labor quickly decreases as labor costs increase (due to the law of diminishing returns), more and more costs are needed to accelerate production. As a result, variable and gross costs rise rapidly as output increases. On the other hand, if the marginal product of labor decreases slightly with an increase in the number of labor resources, costs will not increase as quickly as the volume of production increases. Marginal and average costs are important concepts. As we will see in the next chapter, they have a decisive effect on a firm's choice of output. Knowledge of short-term costs is especially important for firms operating in the face of marked fluctuations in demand. If the firm is currently producing at a volume at which marginal cost rises sharply, uncertainty about future demand increases may force the firm to make changes. manufacturing process and likely to induce additional costs today to avoid higher costs tomorrow.

The understanding of costs will be incomplete if we do not pay attention to the fact that the costs of the company are formed in different ways depending on the type of resources used and the volume of production.

Compare, for example, the costs associated with the use of materials and the costs associated with the use of production facilities.

If materials in the process of manufacturing products lose their appearance, turning into finished products (and some into waste), the production workshops remain in place even after the next batch of products leaves them, in addition, they do not change their size and their equipment.

Let's say that they were built for the production of 100 cars per day. But if in this workshop and on this equipment, due to the decreased demand, not 100, but, say, 90 cars are produced, then neither the size of the workshop, nor the volume of equipment installed in it will change.

Differences in the scale of changes in production resources with changes in production volumes make it possible to break down all types of costs (costs) ( WITH) into two categories:

1) fixed costs;

2) variable costs.

CONSTANT COSTS ( FC) are those costs that cannot be changed in the short run, and therefore they remain the same for any changes in the volume of production of goods or services.

Permanent FC production costs do not depend on the volume of products Q and arise even when production has not yet begun. So, even before the start of production, the enterprise should have at its disposal such factors as buildings, machinery, equipment.

In the short term, fixed costs include, for example, rent for premises, security costs, real estate tax, costs associated with equipment maintenance, payments in repayment of previously received loans, as well as all kinds of administrative and other overhead costs, etc.

VARIABLE COSTS ( VС) are those costs that can be changed in the short term, and therefore they change with any change in production volumes.

TOTAL COSTS ( TS) represent the sum of fixed and variable costs, or the total costs of the firm, for the acquisition of all factors of production and the organization of their functioning.

Total production costs

The relationship between the volume of production and the level of production costs is described using the corresponding curves (Fig. 1).

Figure 1. The structure of total costs and differences in the change in the amounts of fixed and variable costs with changes in production volumes

It is very important for a company to know in dynamics and average costs (AC) firms - the cost of producing one unit of production.

AVERAGE COSTS-costs for the manufacture of a unit of production, obtained by dividing the total cost by the volume of manufactured products for a certain period of time.

Average total costs (total unit costs

products);

- average variable costs (variable costs per unit of output)

Average fixed costs (fixed costs per unit of output)

To understand the nature of average and marginal costs, let's look at the graph (Fig. 2), the data used to construct it are given in table. 1., and for a start we will try to analyze the change with it average costs .

Table 1. - Calculation of costs

Issue volume, units	Variable costs for the entire volume of the issue, thousand rubles	Fixed costs, thousand rubles	Total costs for the entire volume of the issue, thousand rubles	Average variable costs per unit of production, thousand rubles	Average fixed costs per unit of production, thousand rubles	Average total costs per unit of production, thousand rubles	Marginal costs per unit of production, thousand rubles
Q	VC	FC	TC	AVC	AFC	ATC	MC
				1,2	1,5	2,7
				0,8	0,75	1,55	0,4
				0,7	0,5	1,2	0,5
				0,9	0,4	1,3	1,5

Figure 2. Patterns of changes in average costs with increasing

the scale of production and the change in average costs and profits from the sale of a unit of production with an increase in production volumes and the market price at the level of 3.0 million rubles.

AFC - average fixed costs;

AVC is the average variable cost;

ATC - Average Total Costs

MC - marginal cost

П max - the maximum amount of profit from the sale of a unit of production;

P 40 - the amount of profit from the sale of a unit of production with a production volume of 40 units

Table data. 1 and 1, 2 reflect several very important patterns changes in the costs of the firm.

They consist in the fact that as the scale of production increases:

1) the sum (value) of fixed costs does not change, and the sum (value) of average fixed costs (fixed costs per unit of production) decreases;

2) the sum (value) of variable costs increases, and the sum (value) of average variable costs (variable costs per unit of production) first decreases and then increases;

3) the total amount (value) of all costs increases, and the amount (value) of average total costs (total costs per unit of production) first decreases and then increases.

Consequently, the larger the scale a firm manufactures its products (or provides services), the cheaper, on average, it costs each unit of goods at first. Consequently, at a constant market price from each unit of the commodity, the firm will first receive an increasing profit.

The reason This is the steady decline in average fixed costs with an increase in the scale of production.

By definition, the sum of these costs is constant (say, over a month). This means that as the volume of production increases, fixed costs are distributed over a larger number of products, so that the average fixed costs decrease as the volume of output increases.

Therefore, as can be clearly seen in Fig. 2, the curve of these costs AFC falls lower and lower as the volume of production rises.

Due to this, an increase in the scale of production, the creation of ever larger production facilities (within certain limits) provide a significant reduction in both average fixed costs and average total costs.

This economic pattern is called economies of scale.

SCALE EFFECT- an increase in the scale of annual production within certain limits, leading to a decrease in average production costs.

This allows you to either get more profit per unit of goods at constant prices, or reduce prices in order to win a larger market share and get a large mass of profits.

The possibility of reducing the cost of production while increasing its scale to an economically rational limit and the scientific and technological revolution led to a gigantic development in the XX century. serial and mass production of goods. And this not only transformed the industry with the appearance of huge enterprises, but also made it possible to dramatically increase the level of well-being of citizens of industrialized countries.

But the increase in the scale of production cannot be limitless and rational only up to certain limits. Failure to understand this by company managers can lead to wrong decisions.

So, in fig. 2, it can be seen that when a certain limit is exceeded (in our example, the volume of output is 30 units per month), the average variables and total costs not only stop decreasing, but begin to increase. This means that even with a constant market price of goods beyond this border, the growth in production volumes turns into a gradual decrease in the amount of profit from the sale of a unit of goods and even its fall to zero.

This circumstance is illustrated in Fig. 2.

With a monthly output of 30 units, average total costs are the lowest, and the profit per unit of goods is the highest (this is what the arrow indicates P max).

But if the firm continues to increase output during the month, then the average cost will increase (the average cost curve will begin to converge with the line indicating the level of the market price). Then the amount of profit from each unit of production will become less and less (the length of the arrow P 40, showing the amount of profit per unit of production with a production volume of 40 units per month, is significantly less than the arrows P tah).

The reason for this dynamics in average total costs is associated with the influence of changes in costs of another type. These costs are usually called marginal(from the English. margin- "border"), or extreme.

MARGINAL COSTS-the real amount of costs required for the manufacture of each additional unit of production.

Marginal cost MS is the increase in total costs caused by the release of an additional unit of production:

where: ΔТС is the increase in total costs;

ΔQ is the increase in the volume of production;

Marginal costs can be represented as the difference between the production costs of n units of production and the costs of production of n-1 units of products:

MS = TC n - TC n -1,

where: TS n is the total cost of producing the n-th quantity of products;

TC n -1 is the total cost of producing the n-1 quantity of products.

Since with an increase in output, only variable costs increase (TC = VC), then we can write:

Where: - the increase in variable costs;

- the increase in production caused by them.

Marginal cost, showing how much it will cost a firm to increase its output per unit, decisively influences the firm's choice of output, for this is precisely the indicator that the firm can influence.

As production increases, marginal costs first fall and then begin to rise.

Example: If with an increase in sales by 100 units. goods, the costs of the company will increase by 800 rubles, then MC = 800/100 = 8 rubles. This means that the additional unit of goods costs the firm an additional 8 rubles (this is the marginal cost).

You can also say this: marginal cost is the cost associated with the release of the last unit of output.

Let's give an example of calculating costs... Let at release of 10 units. variable costs are 100, and with the release of 11 units. they reach 105. Fixed costs do not depend on the output and are equal to 50. Then:

Q	FC	VC	TC (FC + VC)	AFC (FC / Q)	AVC (VC / Q)	AC (TC / Q)	MC ( TC /  Q)
				4,55	9,55	14,1

In our example, the output increased by 1 unit. (∆ Q = 1), while the variable and total costs increased by 5 (∆ VC = ∆ TC = 5). Consequently, an additional unit of output required an increase in costs by 5. This is the marginal cost of production of the eleventh unit of output (MC = 5).

That. when analyzing the market behavior of a firm, marginal costs play an important role.

The dynamics of costs in the short run can be traced on the graph of the family of curves (Fig. 3):

Figure 3. Dynamics of production costs in the short term

The position of the curve of marginal costs (MC) is due to the movement of variable costs (). Bye MC< AVC, AVC будут снижаться: как только MC>AVC, AVC will begin to grow.

A similar connection between MC and PBX: while MC

Hence, the MC curve intersects the AVC and ATC curves at their minimum points.

The calculation of marginal costs is extremely important, since the entrepreneur must know with what increase in costs the desired increase in production will be associated. Their combination will ultimately give him a signal where it is necessary to stop the expansion of production.

THEN. Scaling up production always requires careful justification to ensure that the marginal cost of producing an additional unit of a good does not equal the proceeds from its sale and the profit becomes zero. In such an economic situation, the firm should stop increasing its output until it finds a way to either reduce the marginal cost of manufacturing them, or to get the goods sold at a higher price.

The basis of any economic decision should contain an answer to the question of correlating what is spent on a particular project and what as a result of its implementation can be obtained on top of the costs incurred. This result is determined by the profit.

Before deciding how much to make a product or product, an enterprise must conduct a cost analysis. Costs in general represent the payment for the acquired factors of production.

Costs are divided into two main groups. Explicit costs include cash payments for factors of production to suppliers. They are fully reflected in the accounting of the company, therefore they are sometimes called accounting costs. Implicit costs include the opportunity cost of using resources that are owned by the enterprise.

In the sum, explicit and implicit costs represent economic costs. Not all costs incurred by an organization need to be included in accounting costs. This is due to the fact that some of the costs are borne by the company at the expense of profits. Examples include income tax, a bonus that is paid by a company at the expense of profits, material assistance to workers, etc.

Opportunity production costs of a product can be measured in terms of the value of the largest missed opportunity that was used to create the factors of production. Opportunity costs also act as the difference in profit that could be obtained with a more efficient use of resources and the actual profit received.

Not all costs or costs can be attributed to opportunity costs. When implementing any method of using resources, costs are not considered as alternative costs that the company incurs without fail. It can be rent of premises, expenses for registration of an enterprise. These costs are not alternative, they do not participate in the process of economic choice.

Fixed and variable costs in the short run

Fixed (TFC) production costs represent the cost of using fixed factors of production. They do not depend on production volumes and are determined by the quantity and price of the resources of a constant nature used.

Production costs in the short run are related to the very existence of the enterprise, paid by it even when no product is produced at all. Fixed-term costs consist of depreciation charges for buildings and structures, equipment, salaries of management personnel, insurance premiums and rental payments.

Short run production costs also include variable costs (TVC). These are the costs that come from the use of variable production factors. Their value depends on the volume of manufactured products, and as the output grows, an increase in this type of costs is observed. These include the cost of raw materials, electricity, wages of basic workers.

Average costs

If we add up the fixed and variable costs, then in the sum we get the total costs. They are sometimes referred to as gross, total, or total costs. They are determined for the short term using the following formula

TC = TFC + TVC

Production costs in the short run are able to characterize the overall level of production costs of the enterprise. Average production costs characterize the level of costs for each unit of production. You can also highlight the average constants (AFC) and variable costs (AVC). By means of average fixed costs, the costs of constant production resources are reflected with the help of which a unit of goods is produced. They can be defined through the ratio of fixed costs and production volume:

AFC = TFC / Q

By means of average variable costs, the costs of variable production resources are reflected with the help of which a unit of goods is produced. Their formula looks like this:

AVC = TVC / Q

Average and marginal costs in the short run

Average production costs in the short run can reflect the costs of fixed and variable resources. Then we can talk about the average total production costs, in accordance with which a unit of production is produced. Average total production costs as a ratio of total costs to production volume:

ATC = TC / Q

Consider also the concept of marginal costs, which are the increase in total costs associated with the release of an additional unit of products. Production costs of a marginal nature characterize the rate at which the total variable costs increase with an expanded volume of production.

The classification of costs shown in the previous section is only one possible way to determine costs. It is also necessary to investigate the dependence of costs on the time factor and on the volume of production. There are three time periods: instant, short-term and long-term. In an instantaneous period, all factors of production are stable, and all types of costs remain constant. In the short run, only some types of costs cannot change, and in the long run, all costs are variable.

In the short run, there are fixed, variable and average and marginal costs.

Fixed costs (FС) - these are costs that do not depend on the volume of products (from the English. fixed- fixed). These primarily include the lease of buildings, equipment, depreciation deductions, salaries of managers and management personnel.

Variable costs (VC) - these are costs, the value of which depends on the volume of output (from the English. variable- variable). These include the cost of raw materials, electricity, auxiliary materials, wages of workers and managers directly involved in production.

Total costs(TS) Is the sum of fixed and variable costs:

In fig. 5.1 presents the costs of the company in the short term. Variable cost curve type VC due to the action of the law of diminishing returns. At first, variable costs increase rather quickly as the production of the product increases (from 0 to the point A), then the growth rate of variable costs slows down, as there is a certain economies of scale of production (from point A to point V). After point V the law of diminishing returns is in effect and the curve becomes steeper.

Rice. 5.1. The costs of the company for the production of products

However, the manufacturer is often interested in the value not so much of the total as in the average costs, since an increase in the former may hide a decrease in the latter. Average constants ( AFC), mean variables ( AVC) and average total costs ( ATC).

Average fixed costs represent fixed costs per unit of production (from the eng. average fixed- average constant):

With an increase in the volume of output, the average fixed costs decrease, so their graph is a hyperbole. When a small number of units are produced, they bear the full brunt of fixed costs. With an increase in the volume of production, the average fixed costs decrease and their value tends to zero.

Average variable costs represent variable costs per unit of output (from the English. average variable- average variable):

They change in accordance with the law of diminishing returns, i.e. have a minimum point that corresponds to the most efficient use of variable resources.

Average total costs (ATC) Is the total cost per unit of output (from the English. average total- average general):

Since total costs are the sum of fixed and variable costs, the value of average costs is the sum of average fixed and average variables:

Accordingly, the nature of the curve ATC will be determined by the type of curves AFC and AVC... The family of average cost curves is shown in Fig. 5.2.

Rice. 5.2. Family of average cost curves

The most important measure of the firm's performance is the marginal cost indicator. It is he who reflects the dynamics of the costs of the firm as the volume of output changes.

Marginal cost (MC) Are the costs associated with the production of an additional unit of output:

where is the increment in total costs; - an increase in the volume of production.

If the total cost function is differentiable, then the marginal cost is the first derivative of the total cost function:

Since the amount of total costs is determined as, then

Three conclusions can be drawn from this expression:

1.if AS increases, then d AC / dQ> 0, hence MS> AS;

2.if AS decreases, then d AC / dQ < 0, значит, MC< АС ;

3.with a minimum of average costs d AC / dQ= 0, therefore MS = AC.

Based on these considerations and based on the graph of the average total cost function (Figure 5.2), we will construct a graph of the marginal cost function together with the graph of the average cost function (Figure 5.3).

Rice. 5.3. Average and marginal cost graph

The increasing branch of the marginal cost curve ( MC) intersects the curves of the mean variables ( AVC) and general average ( ATC) costs at the points of their minima A and B. With an increase in output, the difference between the average total and average variable costs invariably decreases, and the curve AVC is getting closer to the curve ATC.

5.3. The costs of the firm in the long run. Positive and
negative economies of scale

As mentioned above, in the long run, all costs become variable, since the firm can change the volume of all factors of production. She strives to choose the best one.
a combination - one that minimizes the cost of a given volume of production. The desire to increase the volume of output and at the same time reduce unit costs will push the entrepreneur to expand the scale of the firm. As a result, an essentially new, larger enterprise with new production capabilities... In large enterprises, over a long period of time, it becomes possible to apply new technologies and significantly automate production. This leads to an increase in capital costs, but at the same time reduces the use of living labor.

In the long run, we will consider the average total costs, the value of which is determined by the average costs at different options production.

Suppose a manufacturer increases output, that is, gradually increases the size of the firm and can change the way the product is produced. In fig. 5.4 shows the short-term average total costs for different production options. The output at which the average total costs are minimal is denoted for the first option by Q 1, for the second through Q 2, and for the third through Q 3... If the company produces a quantity of products up to, then the first production option should be chosen, since the minimum average costs will be on the curve ATC 1... Transition to the second production method with costs ATC 2 premature as it will only increase costs.

Rice. 5.4. Curve LATC plotted on the basis of short-term curves
average costs

Product release, from volume to most economical to produce with costs that match the curve ATC 2, and from the volume go to the curve ATC 3.

Thus, the long run average cost curve LATC bends around all three short-term curves ATC and shows the minimum production costs with increasing product output.

As seen from Fig. 5.4, ​​curve of average total costs in the long run LATC has also U-shaped as the curve of average costs in a short period, but due to different reasons. Descending portion of the curve showing declining average total costs LATC with an increase in production, corresponds to an increasing return to scale of production, and the ascending segment of this curve, showing an increase in average costs with an increase in production, corresponds to a diminishing return to scale.

Some industries are characterized by consistent returns to scale. Constant returns to scale occur when the quantity LATC does not depend on the volume of release (Fig. 5.5).

Rice. 5.5. Graph of short-term and long-term average total costs with constant returns to scale

Experience shows that with small production volumes, there is an increasing return to scale, with medium volumes - constant, with large volumes - decreasing. However, it should be noted that in some industries (metallurgy, chemistry and others) large enterprises have an advantage over medium and small ones, and they have economies of scale, that is, increasing returns to scale. Their main advantages are:

· Division of labor, intra-firm specialization and cooperation;

· More efficient use of capital;

· The possibility of producing by-products;

· Availability of discounts on purchases;

· Savings in transportation costs.

The list of circumstances that determine the presence of increasing economies of scale can be expanded. However, one way or another, as the enterprise grows larger, sooner or later opposite factors begin to act:

· Bottlenecks appear in technological process;

· Difficulties arise with the sale of a large volume of products;

· Problems of information completeness are growing;

· The costs of maintaining the increasing administrative apparatus, etc., increase.

The action of these factors determines the negative economies of scale, the main way of dealing with which is the artificial unbundling of the enterprise and giving it to its individual components of greater independence.

6. MARKET STRUCTURE. PERFECT AND
IMPERFECT COMPETITION

There are currently five models market economy that are used in various countries: American, German, French, Swedish and Japanese. Each model includes different kinds markets. The market should be understood as the mechanism of interaction between buyers and sellers, as a result of which an equilibrium market price is established.

Competition is a necessary distinguishing feature of market relations. The word "competition" came into the lexicon of economists from everyday speech, and at first it was used quite freely, with an unstable meaning. Depending on the methods of its implementation, a distinction is made between perfect and imperfect competition.