Coursework of Economics

Assessment task 1

1 As Sony begin production of their new product, Playstation Move, define the following costs and explain the short run influences on each one. Illustrate your explanations of each cost with a diagram.

a total cost

[pic 1]

The total cost describes the market value which was invested by the company while producing, and is made up of variable costs and fixed cost which could be differenced by whether the cost could be vary according to the quantity of a good produced and include input. As variable costs, for example, include the labor, raw materials, fuel, power etc. And the things, such as building insurance, tax on property, machinery are all included in fixed costs.

FC curve is a horizontal line because it does not vary with the level of output, it is always a constant quantity. VC curve is an upward sloping curve from the original point because it does vary with the level of output, VC rises as outputs increase. Total Cost is the sum of Fixed Cost and Variable Cost. Therefore, TC curve is also an upward sloping curve. It parallels to the VC curve and the vertical distance is the quantity of FC.

b average cost

[pic 2]

Average cost refers to the average level of cost in a certain range and a certain period. The average cost is always for the certain products or services. The changes of average cost providing by certain period of products or services, often reflects the change in the overall level of cost management in the certain range. The average cost in different periods may have great change, through comparison and analysis, it could show the overall level of changes of cost and indicate the direction for thorough analysis.

And the average cost is the sum of AFC and AVC. When output is small, AC is very high because FC spreads over a small number of units. AFC falls with the increase of outputs, and gradually close to the horizontal axis. AVC curve is a "U" shaped curve, it falls as outputs increase, after AVC falls to the lowest point that lies in AVC curve and MC curve cross, AVC raises as outputs increase. AC curve is also a "U" shaped curve. AC falls rapidly as outputs increase, it falls to the lowest point that lies in AC curve and MC curve cross, after this point, AC raises as outputs increase. When MP is more than AP, with the increase of AP, AVC and AFC all fall, due to AC is the sum of AVC and AFC, AC has decreased. When MP is less than AP, with the decrease of AP, AVC has increased, AFC is close to zero, so AC has increased.

c marginal cost

[pic 3]

Marginal cost refers to the increment of total cost bringing from each unit of new products by production or purchase. MC curve is a "U" shaped curve, it falls rapidly as outputs increase, and to the lowest point then rises rapidly as outputs increase. No matter falls or rises, it changes faster than AVC and AC. As output increases from zero, first of all, inputs of variable factors are relatively less than inputs of fixed factors. Therefore, increasing the inputs of variable factors will raise the efficiency of production. MP has increased, MC falls as outputs increase. After certain output, as continuously increasing the inputs of variable factors, the production is inefficient. MP has decreased. Therefore after that output, MC rises as output increases.