Cost curves analysis: average variable, fixed, and marginal costs

Labor Inputs

Outputs

AVC

AFC

ATC

MC

AVC = total variable costs / output

AVC1= 1000 / 12 = 83.33

AVC2 = 2000 / 32 = 62.5

AVC3 = 3000 / 58 = 51.72

AVC4 = 4000 / 88 = 45.45

AVC5 = 5000 / 110 = 45.45

AVC6 = 6000 / 120 = 50

AVC7 = 7000 / 124 = 56.45

AFC = fixed costs / output

AFC1 = 3000 / 12 = 250

AFC2 = 3000 / 32 = 93.75

AFC3 = 3000 / 58 = 51.72

AFC4 = 3000 / 88 = 34.09

AFC5 = 3000 / 110 = 27.27

AFC6 = 3000 / 120 = 25

AFC7 = 3000 / 124 = 24.19

ATC = AVC + AFC

ATC1 = 83.33 + 250 = 333.33

ATC2 = 62.5 + 93.75 = 156.25

ATC3 = 51.72 + 51.72 = 103.44

ATC4 = 45.45 + 34.09 = 79.54

ATC5 = 45.45 + 27.27 = 72.72

ATC6 = 50 + 25 = 75

ATC7 = 56.45 + 24.19 = 80.64

MC = cost of producing y units -- cost of producing (y-1) units

MC1 = 156.25 -- 333.33 = -177.08

MC2 = 103.44-156.25 = -52.81

MC3 = 79.54-103.44 = -23.9

MC4 = 72.72-79.54 = -6.82

MC5 = 75-72.72 = 2.28

MC6 = 80.64 -- 75 = 5.64

MC7 =

b)

c) the AVC and ATC Curves

The curve of the average variable costs reveals that as the output increases, the variable costs reveal a tendency of decreases. However, they increase once again with the increase of the output. In other words, immediately after the commencement of production, the variable costs decrease; as the production levels increase however, so do the variable costs.

The curve of average total costs has a similar trend as that of the average variable costs. In other words, after the beginning of production, the increase in output results in a decrease of the total costs. The difference here is more obvious than in the case of the AVC curve, but the outcome is similar in the meaning that the increase in output materializes in a consequent increase in the average total costs.

A relevant specification to be made here is that the average total costs curve is generally placed above the average variable cost curve, for the simple reason that the first is the sum of the second and the average fixed costs.

2. Factors in Favour of Monopoly

The practice of monopolistic operations emerges from a multitude of reasons and it often materializes in an organization, or a cartel of organizations, detaining the ultimate power upon a given market. Once it has occurred, the monopolistic organizations may find it easy to consolidate its position due to several factors which favour it. These forces could refer to the creation of economies of scale, the offering of low prices or the legislative regulations. To best understand how these work, take the example of a contemporaneous firm, often engaged in monopolistic discussions.

Microsoft is possibly the ultimate epitome of corporate success, with its founder Bill Gates leading the list of the wealthiest men alive. But what exactly are the factors which still ensure its position? First of all, there is the company's international strength, though which it has created scale economies. This basically means that the software organization has increased access to numerous resources. And this access if often better facilitated than the competitions'. These resources could refer to labor force, technologies, strategic partnerships or marketing resources. This then results in an increased capacity to deliver the highest quality products and services, managing as such to attract the largest numbers of customers. The created economy of scale, alongside with its access to resources, ensures a lower price than that forwarded by the competition. Another factor that supports the monopolistic firm is its brand. Microsoft has created a universal image, which continues to attract large numbers of customers and employees. Finally, in terms of legislative regulations, some state governments have encouraged the creation of monopolies as these are usually easier to regulate. They can be controlled through antitrust policies or through the government's purchasing of corporate stocks and turning as such the organization into a publicly owned one. The latter in not the case of Microsoft, but it has been subjected to antitrust policies and numerous judicial trials. Governments may also encourage monopolistic organizations and they are able to offer lower price goods to the population, reducing as such their overall expenditures and increasing their living standards.

All in all, the economies of scale created by Microsoft ensured the crushing of the competition. The corporate strength and comparative advantages have also ensured a large demand from the consumers, and they have also been stimulated by regulative legislation.

References:

Mixon, J.W., Tohamy, S., Cost Curves and How They Relate, Berry College, Campbell School of Business, http://csob.berry.edu/faculty/economics/CostCurves/CostCurves.htm last accessed on September 29, 2008

Wilcox, J., 1999, Judge Calls Microsoft a Monopoly, CNET News, http://news.cnet.com/2100-1040-232565.html last accessed on September 29, 2008

Zhao, R., 2008, Intermediate Microeconomics, University at Albany, State University of New York, http://www.albany.edu/~rzhao/300/n8.html last accessed on September 29, 2008

Monopoly and Economic Efficiency, Tutor2u, http://tutor2u.net/economics/revision-notes/a2-micro-monopoly-economic-efficiency.html last accessed on September 29, 2008