All types of costs of a company in the short term are divided into fixed and variable.

Fixed costs(FC - fixed cost) - such costs, the value of which remains constant when the volume of output changes. Fixed costs are constant at any level of production. The company must bear them even if it does not produce products.

Variable costs(VC - variable cost) - these are costs, the value of which changes when the volume of output changes. Variable costs increase as production volume increases.

Gross costs(TC - total cost) is the sum of fixed and variable costs. At zero level of output, gross costs are constant. As production volume increases, they increase in accordance with the increase in variable costs.

Examples of different types of costs should be given and their changes due to the law of diminishing returns explained.

The average costs of the company depend on the value of total constants, total variables and gross costs. Average costs are determined per unit of output. They are usually used for comparison with unit price.

In accordance with the structure of total costs, a company distinguishes between average fixed costs (AFC - average fixed cost), average variable costs (AVC - average variable cost), and average total costs (ATC - average total cost). They are defined as follows:

ATC = TC: Q = AFC + AVC

One important indicator is marginal cost. Marginal cost(MC - marginal cost) is the additional costs associated with the production of each additional unit of output. In other words, they characterize the change in gross costs caused by the release of each additional unit of output. In other words, they characterize the change in gross costs caused by the release of each additional unit of output. Marginal costs are defined as follows:

If ΔQ = 1, then MC = ΔTC = ΔVC.

The dynamics of the firm's total, average and marginal costs using hypothetical data are shown in Table.

Dynamics of total, marginal and average costs of a company in the short term

Based on table. Let's build graphs of fixed, variable and gross, as well as average and marginal costs.

The fixed cost graph FC is a horizontal line. The graphs of variable VC and gross TC costs have a positive slope. In this case, the steepness of the VC and TC curves first decreases and then, as a result of the law of diminishing returns, increases.

The AFC average fixed cost schedule has a negative slope. The curves for average variable costs AVC, average gross costs ATC and marginal costs MC have an arcuate shape, that is, they first decrease, reach a minimum, and then take on an upward appearance.

Attracts attention dependence between graphs of average variablesAVCand marginal MC costs, and between the curves of average gross ATC and marginal MC costs. As can be seen in the figure, the MC curve intersects the AVC and ATC curves at their minimum points. This is because as long as the marginal, or incremental, cost associated with producing each additional unit of output is less than the average variable or average gross cost that existed before the production of that unit, average costs decrease. However, when the marginal cost of a particular unit of output exceeds the average cost before it was produced, average variable costs and average gross costs begin to increase. Consequently, equality of marginal costs with average variable and average gross costs (the point of intersection of the MC schedule with the AVC and ATC curves) is achieved at the minimum value of the latter.

Between marginal productivity and marginal cost there is a reverse addiction. As long as the marginal productivity of a variable resource increases and the law of diminishing returns does not apply, marginal cost decreases. When marginal productivity is at its maximum, marginal cost is at its minimum. Then, as the law of diminishing returns takes effect and marginal productivity declines, marginal cost increases. Thus, the marginal cost curve MC is a mirror image of the marginal productivity curve MR. A similar relationship also exists between the graphs of average productivity and average variable costs.

At the center of the classification of costs is the relationship between production volume and costs, the price of a given type of goods. Costs are divided into independent and dependent on the volume of products produced.

Fixed costs do not depend on the volume of production; they exist even at zero production volume. These are the previous obligations of the enterprise (interest on loans, etc.), taxes, depreciation, security payments, rent, equipment maintenance costs with zero production volume, salaries of management personnel, etc. The concept of fixed costs can be illustrated in Fig. 1.

Rice. 1. Fixed costs Chuev I.N., Chechevitsyna L.N. Enterprise economy. - M.: ITK Dashkov and K - 2006. - 225 p.

Let us plot the quantity of output (Q) on the x-axis, and the costs (C) on the y-axis. Then the fixed cost line will be a constant parallel to the x-axis. It is designated FC. Since with an increase in production volume, fixed costs per unit of output decrease, the average fixed cost (AFC) curve has a negative slope (Fig. 2). Average fixed costs are calculated using the formula: AFC = FС/Q.

They depend on the quantity of products produced and consist of the costs of raw materials, materials, wages to workers, etc.

As optimal output volumes are achieved (at point Q1), the growth rate of variable costs decreases. However, further expansion of production leads to accelerated growth of variable costs (Fig. 3).

Rice. 3.

The sum of fixed and variable costs forms gross costs- the amount of cash costs for the production of a certain type of product.

The difference between fixed and variable costs is essential for every businessman. Variable costs are costs that an entrepreneur can control, the value of which can be changed over a short period of time by changing the volume of production. On the other hand, fixed costs are obviously under the control of the company's administration. Such costs are mandatory and must be paid regardless of the volume of production 11 See: McConnell K. R. Economics: principles, problems, policies / McConnell K. R., Brew L. V. In 2 volumes / Translated from English . 11th ed. - T. 2. - M.: Republic, - 1992, p. 51..

To measure the cost of producing a unit of output, the categories of average, average fixed and average variable costs are used. Average costs equal to the quotient of total costs divided by the quantity of products produced. determined by dividing fixed costs by the number of products produced.

Rice. 2.

Determined by dividing variable costs by production volume:

АВС = VC/Q

When the optimal production size is achieved, average variable costs become minimal (Fig. 4).

Rice. 4.

Average variable costs play an important role in the analysis of the economic state of the company: its equilibrium position and development prospects - expansion, reduction of production or exit from the industry.

General costs - the totality of a firm's fixed and variable costs ( TC = FC + VC).

Graphically, total costs are depicted as a result of the summation of fixed and variable cost curves (Fig. 5).

Average total costs are the quotient of total costs (TC) divided by production volume (Q). (Sometimes the average total costs of ATS in economic literature are denoted as AC):

AC (ATC) = TC/Q.

Average total costs can also be obtained by adding average fixed and average variable costs:

Rice. 5.

Graphically, average costs are depicted by summing the curves of average fixed and average variable costs and have a Y-shape (Fig. 6).

Rice. 6.

The role of average costs in a company's activities is determined by the fact that their comparison with the price allows one to determine the amount of profit, which is calculated as the difference between total revenue and total costs. This difference serves as a criterion for choosing the right strategy and tactics for the company.

The concepts of total and average costs are not enough to analyze the behavior of a company. Therefore, economists use another type of cost - marginal.

Marginal cost - This is the increment in the total cost of producing an additional unit of output.

The category of marginal costs is of strategic importance because it allows you to show the costs that a company will have to incur if it produces one more unit of output or save if it reduces production by this unit. In other words, marginal cost is the amount that a firm can control directly.

Marginal costs are obtained as the difference between production costs n + 1 units and production costs P units of product.

Since when output changes, fixed costs FV do not change, the change in marginal costs is determined only by the change in variable costs as a result of the release of an additional unit of output.

Graphically, marginal costs are depicted as follows (Fig. 7).

Rice. 7. Marginal and average costs Chuev I.N., Chechevitsyna L.N. Enterprise economy. - M.: ITK Dashkov and K - 2006. - 228 p.

Let us comment on the basic relationships between average and marginal costs.

The size of marginal and average costs are extremely important, since they primarily determine the firm's choice of production volume.

MS do not depend on FC , since FC do not depend on the volume of production, and MS are incremental costs.

As long as MC is less than AC, the average cost curve has a negative slope. This means that producing an additional unit of output reduces average cost.

When MC is equal to AC, this means that average costs have stopped decreasing, but have not yet begun to increase. This is the point of minimum average costs (AC = min).

5. When MC becomes larger than AC, the average cost curve goes up, indicating an increase in average costs as a result of producing an additional unit of output.

6. The MC curve intersects the AVC curve and the AC curve at the points of their minimum values ​​(Fig. 7).

Under average refers to the plant’s costs for the production and sale of a unit of goods. Highlight:

* average fixed costs A.F.C., which are calculated by dividing the firm's fixed costs by production volume;

* average variable costs AVC, calculated by dividing variable costs by production volume;

* average gross costs or the total cost per unit of a vehicle product, which are determined as the sum of average variable and average fixed costs or as the quotient of dividing gross costs by output volume (their graphical expression is in Appendix 3).

* according to the methods of accounting and grouping costs, they are divided into simple(raw materials, materials, wages, wear and tear, energy, etc.) and complex, those. collected into groups either by functional role in the production process or by location of costs (shop expenses, factory overhead, etc.);

* the terms of use in production differ from daily, or current, costs and one-time, one-time costs incurred less than once a month and economic cost analysis uses marginal costs.

Average total cost (ATC) is the total cost per unit of output and is commonly used for comparison with price. They are defined as the quotient of total costs divided by the number of units produced:

TC = ATC / Q (2)

(AVC) is a measure of the cost of a variable factor per unit of output. They are defined as the quotient of gross variable costs divided by the number of units of production and are calculated using the formula:

AVC = VC / Q. (3)

Average fixed cost (AFC) is a measure of fixed costs per unit of output. They are calculated using the formula:

AFC=FC/Q. (4)

Graphic dependences of the values ​​of various types of average costs on the volume of output are presented in Fig. 2.

Rice. 2

From the data analysis in Fig. 2 we can draw conclusions:

1) the AFC value, which is the ratio of the constant FC to the variable Q (4), is a hyperbola on the graph, i.e. with an increase in production volume, the share of average fixed costs per unit of output decreases;

2) the AVC value is the ratio of two variables: VC and Q (3). However, variable costs (VC) are almost directly proportional to product output (since the more products planned to be produced, the higher the costs will be). Therefore, the dependence of AVC on Q (volume of products produced) looks like an almost straight line parallel to the x-axis;

3) ATC, which is the sum of AFC + AVC, looks like a hyperbolic curve on the graph, located almost parallel to the AFC line. Thus, as with AFC, the share of average total cost (ATC) per unit of output decreases as production volume increases.

Average total costs first decrease and then begin to increase. Moreover, the ATC and AVC curves are getting closer. This occurs because average fixed costs over the short run decrease as output increases. Consequently, the difference in the height of the ATC and AVC curves at a certain volume of production depends on the value of AFC.

In the specific practice of using cost calculation to analyze the activities of enterprises in Russia and in Western countries, there are both similarities and differences. The category is widely used in Russia cost price, representing the total costs of production and sales of products. Theoretically, the cost should include standard production costs, but in practice it includes excess consumption of raw materials, materials, etc. Cost is determined based on the addition of economic elements (costs that are homogeneous in terms of their economic purpose) or by summing up costing items that characterize the direct directions of certain expenses.

Both in the CIS and in Western countries, to calculate costs, a classification of direct and indirect costs (expenses) is used. Direct costs- These are the costs directly associated with the creation of a unit of goods. Indirect costs necessary for the general implementation of the production process of this type of product at the enterprise. The general approach does not exclude differences in the specific classification of some articles.

Due to the volume of output, costs in the short term are divided into fixed and variable.

Constants do not depend on the volume of output (FC). These include: depreciation costs, wages for employees (as opposed to workers), advertising, rent, electricity bills, etc.

The variables depend on the volume of output (VC). For example, costs for materials, wages of main production workers, and others.

Fixed costs (costs) exist even with zero output (therefore they are never equal to zero). For example, regardless of whether the product is produced or not. You still need to pay rent for the premises. On the graph of the dependence of the value of costs (C) on the volume of production (Q), fixed costs (FC) look like a horizontal straight line, since they are not related to the manufactured products (Fig. 1).

Since variable costs (VC) depend on output, the more products are planned to be produced, the more costs need to be incurred for this. If nothing is produced, then there are no costs. Thus, the value of variable costs is in direct positive dependence on the volume of output and on the graph (see Fig. 1) represents a curve emerging from the origin.

The sum of fixed and variable costs is equal to total (gross) costs:

TC=FC+VC.(1)

Based on the above formula, on the graph the total cost (TC) curve is plotted parallel to the variable cost curve, however, it does not come from zero, but from a point on the y-axis. the corresponding amount of fixed costs. We can also conclude that as production volume increases, total costs also increase proportionally (Fig. 1).

All types of costs considered (FC, VC and TC) relate to the entire output.

Rice. 1 Dependence of total costs (TC) on variable (VC) and fixed (FC).

Every organization strives to achieve maximum profit. Any production incurs costs for the purchase of factors of production. At the same time, the organization strives to achieve such a level that a given volume of production is provided at the lowest possible cost. The firm cannot influence the prices of resources. But, knowing the dependence of production volumes on the number of variable costs, it is possible to calculate costs. Cost formulas will be presented below.

Types of costs

From an organizational point of view, expenses are divided into the following groups:

• individual (expenses of a particular enterprise) and social (costs of manufacturing a specific type of product incurred by the entire economy);
• alternative;
• production;
• are common.

The second group is further divided into several elements.

Total expenses

Before studying how costs and cost formulas are calculated, let's look at the basic terms.

Total costs (TC) are the total costs of producing a certain volume of products. In the short term, a number of factors (for example, capital) do not change, and some costs do not depend on output volumes. This is called total fixed costs (TFC). The amount of costs that changes with output is called total variable costs (TVC). How to calculate total costs? Formula:

Fixed costs, the calculation formula for which will be presented below, include: interest on loans, depreciation, insurance premiums, rent, wages. Even if the organization does not work, it must pay rent and loan debt. Variable expenses include salaries, costs of purchasing materials, paying for electricity, etc.

With an increase in output volumes, variable production costs, the calculation formulas for which were presented earlier:

• grow proportionally;
• slow down growth when reaching the maximum profitable production volume;
• resume growth due to violation of the optimal size of the enterprise.

Average expenses

Wanting to maximize profits, the organization seeks to reduce costs per unit of product. This ratio shows a parameter such as (ATC) average cost. Formula:

ATC = TC\Q.

ATC = AFC + AVC.

Marginal costs

The change in total costs when production volume increases or decreases by one unit shows marginal costs. Formula:

From an economic point of view, marginal costs are very important in determining the behavior of an organization in market conditions.

Relationship

Marginal cost must be less than total average cost (per unit). Failure to comply with this ratio indicates a violation of the optimal size of the enterprise. Average costs will change in the same way as marginal costs. It is impossible to constantly increase production volume. This is the law of diminishing returns. At a certain level, variable costs, the calculation formula for which was presented earlier, will reach their maximum. After this critical level, an increase in production volumes even by one will lead to an increase in all types of costs.

Example

Having information about the volume of production and the level of fixed costs, it is possible to calculate all existing types of costs.

Without engaging in production, the organization incurs fixed costs of 60 thousand rubles.

Variable costs are calculated using the formula: VC = TC - FC.

If the organization is not engaged in production, the amount of variable costs will be zero. With an increase in production by 1 piece, VC will be: 130 - 60 = 70 rubles, etc.

Marginal costs are calculated using the formula:

MC = ΔTC / 1 = ΔTC = TC(n) - TC(n-1).

The denominator of the fraction is 1, since each time the volume of production increases by 1 piece. All other costs are calculated using standard formulas.

Opportunity Cost

Accounting expenses are the cost of the resources used in their purchase prices. They are also called explicit. The amount of these costs can always be calculated and justified with a specific document. These include:

• salary;
• equipment rental costs;
• fare;
• payment for materials, bank services, etc.

Economic costs are the cost of other assets that could be obtained from alternative uses of resources. Economic costs = Explicit + Implicit costs. These two types of expenses most often do not coincide.

Implicit costs include payments that a firm could receive if it used its resources more profitably. If they were bought in a competitive market, their price would be the best among the alternatives. But pricing is influenced by the state and market imperfections. Therefore, the market price may not reflect the true cost of the resource and may be higher or lower than the opportunity cost. Let us analyze in more detail the economic costs and cost formulas.

Examples

An entrepreneur, working for himself, receives a certain profit from his activities. If the sum of all expenses incurred is higher than the income received, then the entrepreneur ultimately suffers a net loss. It, together with net profit, is recorded in documents and refers to explicit costs. If an entrepreneur worked from home and received an income that exceeded his net profit, then the difference between these values ​​would constitute implicit costs. For example, an entrepreneur receives a net profit of 15 thousand rubles, and if he were employed, he would have 20,000. In this case, there are implicit costs. Cost formulas:

NI = Salary - Net profit = 20 - 15 = 5 thousand rubles.

Another example: an organization uses in its activities premises that belong to it by right of ownership. Explicit expenses in this case include the amount of utility costs (for example, 2 thousand rubles). If the organization rented out this premises, it would receive an income of 2.5 thousand rubles. It is clear that in this case the company would also pay utility bills monthly. But she would also receive net income. There are implicit costs here. Cost formulas:

NI = Rent - Utilities = 2.5 - 2 = 0.5 thousand rubles.

Returnable and sunk costs

The cost for an organization to enter and exit a market is called sunk costs. No one will return the costs of registering an enterprise, obtaining a license, or paying for an advertising campaign, even if the company ceases operations. In a narrower sense, sunk costs include costs for resources that cannot be used in alternative ways, such as the purchase of specialized equipment. This category of expenses does not relate to economic costs and does not affect the current state of the company.

Costs and price

If the organization's average costs are equal to the market price, then the firm makes zero profit. If favorable conditions increase the price, the organization makes a profit. If the price corresponds to the minimum average costs, then the question arises about the feasibility of production. If the price does not cover even the minimum variable costs, then the losses from the liquidation of the company will be less than from its functioning.

International distribution of labor (IDL)

The world economy is based on MRT - the specialization of countries in the production of certain types of goods. This is the basis of any type of cooperation between all states of the world. The essence of MRI is revealed in its division and unification.

One production process cannot be divided into several separate ones. At the same time, such a division will make it possible to unite separate industries and territorial complexes and establish interconnections between countries. This is the essence of MRI. It is based on the economically advantageous specialization of individual countries in the production of certain types of goods and their exchange in quantitative and qualitative ratios.

Development factors

The following factors encourage countries to participate in MRI:

• Volume of the domestic market. Large countries have greater ability to find the necessary factors of production and less need to engage in international specialization. At the same time, market relations are developing, import purchases are compensated by export specialization.
• The lower the state's potential, the greater the need to participate in MRI.
• The country's high supply of monoresources (for example, oil) and low level of mineral resources encourage active participation in MRT.
• The greater the share of basic industries in the structure of the economy, the less the need for MRI.

Each participant finds economic benefit in the process itself.

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10.11 Types of costs

When we looked at the periods of production of a firm, we said that in the short run the firm can change not all the factors of production used, while in the long run all factors are variable.

It is precisely these differences in the possibility of changing the volume of resources when changing production volumes that forced economists to divide all types of costs into two categories:

1. fixed costs;
2. variable costs.

Fixed costs(FC, fixed cost) are those costs that cannot be changed in the short term, and therefore they remain the same with small changes in the volume of production of goods or services. Fixed costs include, for example, rent for premises, costs associated with maintaining equipment, payments to repay previously received loans, as well as all kinds of administrative and other overhead costs. Let's say it is impossible to build a new oil refining plant within a month. Therefore, if next month an oil company plans to produce 5% more gasoline, then this is only possible on existing production facilities and with existing equipment. In this case, a 5% increase in output will not lead to an increase in the costs of servicing equipment and maintaining production facilities. These costs will remain constant. Only the amounts of wages paid, as well as the costs of materials and electricity (variable costs) will change.

The fixed cost graph is a horizontal line.

Average fixed costs (AFC, average fixed cost) are fixed costs per unit of output.

Variable costs(VC, variable cost) are those costs that can be changed in the short term, and therefore they grow (decrease) with any increase (decrease) in production volumes. This category includes costs for materials, energy, components, and wages.

Variable costs show the following dynamics depending on the volume of production: up to a certain point they increase at a killing pace, then they begin to increase at an increasing pace.

The variable cost schedule looks like this:

Average variable costs (AVC, average variable cost) are variable costs per unit of output.

The standard Average Variable Cost graph looks like a parabola.

The sum of fixed costs and variable costs is total costs (TC, total cost)

TC = VC + FC

Average total costs (AC, average cost) are the total costs per unit of production.

Also, average total costs are equal to the sum of average fixed and average variable costs.

AC = AFC + AVC

AC graph looks like a parabola

Marginal costs occupy a special place in economic analysis. Marginal cost is important because economic decisions typically involve marginal analysis of available alternatives.

Marginal cost (MC, marginal cost) is the increment in total costs when producing an additional unit of output.

Since fixed costs do not affect the increment in total costs, marginal costs are also an increment in variable costs when producing an additional unit of output.

As we have already said, formulas with derivatives in economic problems are used when smooth functions are given, from which it is possible to calculate derivatives. When we are given individual points (discrete case), then we should use formulas with increment ratios.

The marginal cost graph is also a parabola.

Let's plot the marginal cost graph together with the graphs of average variables and average total costs:

The above graph shows that AC always exceeds AVC since AC = AVC + AFC, but the distance between them decreases as Q increases (since AFC is a monotonically decreasing function).

The graph also shows that the MC graph intersects the AVC and AC graphs at their minimum points. To justify why this is so, it is enough to recall the relationship between average and maximum values ​​already familiar to us (from the “Products” section): when the maximum value is below the average, then the average value decreases with increasing volume. When the marginal value is higher than the average value, the average value increases with increasing volume. Thus, when the marginal value crosses the average value from bottom to top, the average value reaches a minimum.

Now let’s try to correlate the graphs of general, average, and maximum values:

These graphs show the following patterns.

Figure 4 – Marginal costs

Average costs (ATC, AVC, AFC)

Any manufacturer is interested in how much it costs him to produce a unit of output on average. There are average total costs (ATC), average variable costs (AVC) and average fixed costs (AFC).

Average fixed costs (AFC)* represent fixed costs per unit of production. They are determined by dividing fixed costs by the quantity of output: AFC =FC /Q. As output increases, average fixed costs will decrease. For example, fixed costs

production is equal to 100 thousand rubles. Let us assume that initially the volume of output Q 1 is equal to 10 units. Then AFC1 = 100 thousand rubles /10 = 10 thousand rubles. Then the output volume increased to 50 units: AFC2 = 100 thousand rubles / 50 = 2 thousand rubles. If the volume of output increases to 100 units, then AFC3 = 100 thousand rubles / 100 = 1 thousand rubles.

Average Variable Cost (AVC)* represent variable costs per unit of production and are obtained by dividing variable costs by the volume of output: AVC =VC /Q.

Average Total Cost (ATC)* show the total costs per unit of production and are determined by the formula: ATC =TC /Q. Since total costs can be represented as the sum of fixed and variable costs (TC = FC + VC), the value of average total

costs are defined as the sum of average fixed and average variable costs:

ATC =TC /Q =FC + VC /Q = AFC + AVC .

The family of average and variable cost curves is presented in Figure 5.

Figure 5 – Enterprise costs in the short term

There are important relationships between marginal, average total and average variable costs. First of all, this concerns the relationship between MC and AVC. If the variable costs per unit of output are higher than the marginal costs, then they decrease with each subsequent unit of output produced. If AVC becomes less than MC, then the AVC value begins to increase. Therefore, equality arises between these two parameters (in Fig. 5 this is point A) when AVC takes the minimum value. The average total cost curve is the sum of average fixed and average variable costs, and it is variable costs that play the decisive role here. Therefore, the patterns characteristic of the relationship between MC and AVC are valid for MC and ATC. This means that the MC curve crosses the ATS at its minimum.

From the graphs in Fig. 5 it can be seen that the ATC and AVC curves are U-shaped.

Total, average, marginal revenue and profit of the company

Any company operating in a market environment must determine its strategy, by implementing which it can obtain maximum profit. Under what conditions is this possible, what volume of output will give the desired result? In accordance with the answer to the questions asked, the company's management chooses its model of behavior in the market.

Before we move on to analyzing a firm's behavior in constantly changing market conditions, it is necessary to understand what the firm's total revenue or revenue (TR), marginal revenue (MR) and average revenue (AR) are.

Total revenue (or gross income TR)* of a firm is understood as the amount of funds received from the sale of all produced units of goods at the market price:

TR = P · Q, where Q is the quantity of products produced and sold, P is the price of units sold.

Average revenue (AR)* is the income received from the sale of one unit of production on average. It is calculated by dividing the total revenue TR by the number

units of goods sold:

AR =TR/Q.

Marginal revenue (MR)* represents the increment in total revenue when producing an additional unit of output. It can be determined by dividing

increase in total income (TR) by changes in output (Q): MR = TR / Q.

To complete your introduction to general economic categories, you need to figure out when a firm will have a profit and when it will have a loss. The profit of any company is formed as the difference between the total revenue received (TR) and total costs

(TC): TPr = TR - TC, where TPr is the firm’s profit*.

If a firm's total revenue (TR) is greater than its total costs (TC), then the firm is making a profit. When total costs exceed total revenue, the firm has a negative profit, or loss.

Profit maximization by a competitive firm

In the following analysis, it is assumed that the main objective of the firm is profit maximization.

It is known that with perfect competition the price of all units of sold products is the same; it does not change with an increase in the quantity of goods sold.

Let's set data on the work of a competitive company (Table 2), and try to express graphically the relationship between total income and costs (Figure 6).

Since the price of products does not change under perfect competition, it is obvious that the total income of the company will be formed depending on the quantity of products sold, and will represent a straight line with a positive slope emanating from the origin. The angle of inclination of TR to the x-axis is equal to the ratio of the change in income to the change in output, that is, marginal income.

Under perfect competition, each subsequent unit of output sold is sold at the same price as the previous one. Therefore, the average income received from each unit of production will be constant and will be equal to the price

units of production:

AR =TR /Q =P · Q /Q = P .

In addition, since all units of production are sold at the same price, the revenue from the sale of an additional unit of product MR will be equal to the average income and price of the product on the market:

Figure 6 - Relationship between total income and costs

Figure 7 shows that the graph of marginal and average income coincides with the price line, and therefore with the firm’s demand line. The table data also shows that

Figure 7 – Graph of marginal and average income

The table shows that up to a certain volume of production (up to Q = 5), total costs exceed total income. In this case, profit is negative. On the graph this corresponds to sector I. With an increase in output, both total income and total costs increase, but the latter lag behind in growth rates. At a certain output volume (Q = 5), TR becomes equal to TC, after which the firm begins to make a profit (In Fig. 6 this corresponds to point A). Further, the amount of profit increases.