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Production cost and perfect competition

Campbell et al (2005) defines the marginal cost of production as a measure of the changes in production cost if one extra unit is produced and it helps to determine the optimum level of production. As for our case of Chevrolet caprice by producing their current volume their cost is lowest at $ 12500 and if they increase they production volume while keeping all the other factors of production constant then the company’s cost of production will start increasing and they will no longer enjoy the benefits of large scale production.

2. Diseconomies of scale and diminishing returns.

Campbell et al (2005) describes diseconomies of scale as the disadvantages that a firm incurs as a result of producing in large quantities or grown in size this is a situation that occurs in the long run. In reference to cost curves it is a point at which the marginal cost of a firm’s production is increasing as the quantity being produced increases leading to reduced returns. Some of these disadvantages include;

a) Poor communication systems- with more employees communication becomes a more complex process causing distortion and less co-ordination of tasks which will lower production returns.

b) Increase in conflicts within the employees which may

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take more time to resolve conflicts than on organization’s activities.

c) The equipment capacity of production will be strained if they are not changed to accommodate the production of large quantities. As summarized in Campbell et al (2005) diminishing returns is a situation where in the short run for a firm as it continues to add on the variable inputs of production the output realized is low as compared to the units of inputs that have been used.

In relation to cost curves it is a point at which the marginal return from production is increasing but a low rate as more inputs are being added to a production unit. While diseconomies of scale come in the long run after a firm has been in operation and has already enjoyed the benefits of operating in large scale. Diminishing returns it is a short term effect that can happen while the firm is at any stage of operation thus likely to occur more often as input levels are being adjusted and thus making diminishing returns more pervasive.

3. How diminishing returns affect decisions of a farmer’s production. As pointed out in Campbell et al (2005) land is a fixed input and the variable inputs are like labor, fertilizer etc. My decisions will be affected the quantity of yields I will from the piece of land. With an initial harvest I will have keep increasing the labor force that I use to cultivate my land up to a point where the yield will not be matching to the labor that I use then I will have to make decisions of increasing planting intervals and reduce the space between the crops so as to increase the output levels in future. Read also what is the marginal cost of producing a Fifth Soccer net

4. How economic profit and accounting profit differ? Campbell et al (2005) states that economic profit is achieved when opportunity cost derived from inputs exceed the revenue of a commodity. Therefore, accounting profit is realized from deducting production costs from the revenue generated by a commodity after selling. Amos McCoy when he plants corn on his farm he will earn an accounting profit of $ 100 per acre and $ 200 per acre when he plants soy beans.

The opportunity cost will be the amount of money that he could have received had he planted soybeans. Then Economic profit =total revenue from sale of corn – opportunity cost 100-200=-100 (an economic loss) meaning that had he planted soybeans he could have gained $ 100 more than revenue from sale of corn per acre.


Campbell R. McConnell, Stanley L. Brue (2005): Economics: Principles, problems and policies 16th edition McGraw-hill professional publishers.

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