Production Cost

Production Cost

Plan:

• Short-term and long-term activities of enterprise.
• Cost curves and their shapes.
• Short-term and long-term expenses.
• The relationship between average total costs in the short run and long run.

SHORT-TERM AND LONG-TERM ACTIVITIES OF ENTERPRISE. 1. Goals that can happen quickly are called short-term goals. Goals that take a long time to achieve are called long-term goals. Short-term planning looks at the characteristics of the company in the present and develops strategies for improving them. Examples are the skills of the employees and their attitudes. The condition of production equipment or product quality problems are also short-term concerns. 2. In the long term, companies want to solve problems permanently and to reach their overall targets. Long-term planning reacts to the competitive situation of the company in its social, economic and political environment and develops strategies for adapting and influencing its position to achieve long-term goals. It examines major capital expenditures such as purchasing equipment and facilities, and implements policies and procedures that shape the company's profile to match top management's ideas.

COST CURVES AND THEIR SHAPES. The cost of producing a firm’s output depends on how much labor and capital the firm uses. A list of the costs involved in producing cars will look very different from the costs involved in producing computer software or haircuts or fast-food meals. However, the cost structure of all firms can be broken down into some common underlying patterns. When a firm looks at its total costs of production in the short run, a useful starting point is to divide total costs into two categories: fixed costs that cannot be changed in the short run and variable costs that can be changed.

SHORT-TERM AND LONG-TERM EXPENSES. Long run-costs are accumulated when firms change production levels over time in response to expected economic profits or losses. In the long run there are no fixed factors of production. The land, labor, capital goods, and entrepreneurship all vary to reach the the long run cost of producing a good or service. The long run is a planning and implementation stage for producers. They analyze the current and projected state of the market in order to make production decisions. Efficient long run costs are sustained when the combination of outputs that a firm produces results in the desired quantity of the goods at the lowest possible cost. Examples of long run decisions that impact a firm's costs include changing the quantity of production, decreasing or expanding a company, and entering or leaving a market. Short run-costs are accumulated in real time throughout the production process. Fixed costs have no impact of short run costs, only variable costs and revenues affect the short run production. Variable costs change with the output. Examples of variable costs include employee wages and costs of raw materials. The short run costs increase or decrease based on variable cost as well as the rate of production. If a firm manages its short run costs well over time, it will be more likely to succeed in reaching the desired long run costs and goals.

THE RELATIONSHIP BETWEEN AVERAGE TOTAL COSTS IN THE SHORT RUN AND LONG RUN . For many firms, the division of total costs between fixed and variable costs depends on the time horizon. Consider, for instance, a car manufacturer, such as Ford Motor Company. Over a period of only a few months, Ford cannot adjust the number or sizes of its car factories. The’ only way it can produce additional cars is to hire more workers at the factories it already has. The cost of these factories is, therefore, a fixed cost in the short run. By contrast, over a period of several years, Ford can expand the size of its factorizes, build new factories, or close old ones. Thus, the cost of its factories is a variable cost in the long run. Because many decisions are fixed in the short run but van able in the long run, a firm’s long-run cost curves differ from its short-run cost curves. Figure 6 shows an example. The figure presents three short run average-total-cost curves for a small, medium, and large factory. It also presents the long-run average total cost curve. As the firm moves along the long-run curve, it is adjusting the size of the factory to the quantity of production.

This slide is prepared by(1.Lutfillaev Khumoyiddin/ 2.Sobirjanov Sanjar/ 3.Tukhtanazarov Umidjon/ 4.Yetmishboev Khodjiakbar.)