Microeconomic activity of the firm is primarily estimated by the balance of inputs and outputs, and financial result of work. Such economical figures as total costs consisting of total fixed costs (which do not depend from the level of output) and total variable costs (the costs which depend on the level of output) are frequently used to define financial results and efficiency of the firm’s operations (Baumol & Blinder 2008). The aim of this essay is to analyze the economical activity of a given company in situation with different fixed costs, and research whether the company’s productivity may be improved, or it is only reasonable to close the firm immediately.
In our case, such values as number of workers, daily wage of workers, number of units produced by the firm per day, and output of the firm per unit are given. Other variable inputs are also indicated, and the value of fixed costs is given different for 2 situations. The first step in evaluating economical activity of the firm is to calculate the main economical parameters such as total variable cost, total costs, average variable cost and average total cost and worker productivity. The formulas for the calculation are the following:
1) Total Variable Cost = (Number of Workers * Worker’s Daily Wage) + Other Variable Costs
2) Average Variable Cost = Total Variable Cost / Units of Output per Day
3) Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day
4) Worker Productivity = Units of Output per Day / Number of Workers
After calculating these basic values, it is possible to determine whether the firm is receiving profit, or experiencing losses, and allows calculating the difference between output and average total cost which is either generating profit or serves as a source of losses (Mankiw 2008).
Further, these values allow determining the total output, total input and financial result of the company’s operations.
The formulas given above were used to evaluate economical activity of a given firm in two cases with two different fixed costs.