Optimum exploitation

economic-dictionary

The optimum of exploitation is the level of production where the total average costs of the company are minimized in the short term.

In optimum exploitation, the company produces at the lowest possible costs and uses its productive factors efficiently. Regarding the cost curves, we have that at this point, the Average Total Costs curve (CTM) reaches its minimum and it is satisfied that the Average Total Cost is equal to the Marginal Cost (CM).

At the level of production corresponding to the optimum of exploitation, the total income is equal to the total costs so the company can pay its productive factors, but not obtain extraordinary benefits.

Optimum exploitation graph

In the following graph we can see the optimal exploitation. At point E, which corresponds to the optimum for exploitation, the Short-Term Total Average Costs curve (CMe curve) reaches its minimum level and at that same point it intersects the Marginal Cost Curve (CM).

The CMe curve, in turn, is the sum of the Variable Average Cost curve (CMeV) and the Fixed Average Cost curve (CMeF).

Characteristics of the optimum exploitation

When a company reaches its optimum exploitation, it manages to produce at the lowest possible cost. Indeed, if it is located outside this point, say where the Marginal Cost is less than the Average Cost, then producing an additional unit will be convenient for the company since unit costs are reduced. On the other hand, if the company is located at a point where the Marginal Cost is higher than the Average Cost, increasing production will also increase unit production costs.

In the optimum of exploitation the following is fulfilled:

  • The company makes efficient use of its productive factors.
  • It is possible to produce at the lowest possible cost.
  • If we are in a competitive market and the price is equal to the marginal cost, the company manages to cover its costs exactly (rewarding its productive factors).
  • Producing an additional unit will increase the average costs of the company.
  • It is a short term concept.
Total cost

Tags:  Business bag passes 

Interesting Articles

add