AP Microeconomics

Costs in the Short Run

How would you label each of these curves?

How are each of the three curves derived?

TP: units of labor and the output they produce.

Total Product

Average Product

Marginal Product

How would you label each of these curves?

How are each of the three curves derived?

AP: TP ÷ Units of Labor

MP: the extra units of TP derived from the addition of one more unit of labor

Total Product

Average Product

Marginal Product

What do you think these stages represent? The Three Stages of Production Stage 1: Increasing Returns:

MP is pos & increasing Stage 2: Diminishing Returns

MP is pos, but decreasing Stage 3: Negative Returns

MP is negative

At what stage of production should a producer be at?

What more information would you need to know to determine the exact point of perfect production?

Costs in the Short Run

Short Run *firms face limits imposed by some fixed

factor of production *new firms cannot enter and existing firms

cannot leave

Costs in the Short Run

The Total Costs a firm incurs can be calculated by adding together the firms fixed costs and variable costs.

TC = TFC + TVC

Costs in the Short Run

Fixed Costs (TFC):costs that a firm must pay even at a zero

production; in the short run they are constant. Variable Costs (TVC):

costs that depend on the level of production chosen

Can you distinguish between fixed costs (FC) and variable costs (VC)?

1. ____ Mortgage payments on a factory

2. ____ Expenses for hot dog buns at a restaurant

3. ____ Electric bills at an all-electric print ship

4. ____ The cost of a new printing press

5. ____ Wages paid to auto workers

6. ____ Long-term salary contracts with top management

7. ____ Insurance premiums at a factory

8. ____ A salesperson’s mileage expenses

9. ____ Lease payments on rented equipment

10. ____ Advertising11. ____ Security guards on

premises12. ____ Property Taxes

F

V

V

F

V

F

F

V

F

VF

F

Costs in the Short Run

Some businesses’ fixed costs make up a larger portion of their Total Costs. What type of businesses would have higher fixed costs than variable costs?

Some businesses’ variable costs make up a larger portion of their Total Costs. What type of businesses would have higher variable costs than fixed costs?

Costs in the Short Run

Total Fixed Costs (TFC), sometimes called overhead, are those costs that do not change with output. Firms have no control over fixed costs in the short run; for this reason, fixed costs are sometimes called sunk costs. Because in the short run TFC are constant, the graph is:

Horizontal TFC

Quantity

cost

Costs in the Short Run

Average Fixed Cost (AFC): sometimes called spreading overhead; AFC = TFC

q

Whereas TFC is a horizontal line, AFC is a downward sloping line. As output is increased, AFC will decline getting closer and closer to zero; however AFC will never reach zero.

Let’s complete the table and graph it

Computing & Graphing

q TFC AFC

0 $1,000

1 1,000

2 1,000

3 1,000

4 1,000

5 1,000

---

$1000

$500

$333.33

$250

$200

C O S T ($)

Units of Output1 2 3 4 5

0

250

500

750

1000 TFC

AFC

Costs in the Short Run

Total Variable Costs (TVC): the sum of those costs that vary with

the level of output in the short run This cost depends on the techniques of

production that are available and the prices of the inputs required by each technology.

Output Using Technique

Units of Input Required Total Variable Cost(PK = $2, PL = $1)K L

0 A 0 0

B 0 0

1 A 4 4

B 2 6

2 A 7 6

B 4 10

3 A 9 6

B 6 14

$0

$0

$12

$14

$20$18

$24

$26

Graphing TVC When graphing Total Variable Cost the graph shows

the relationship between level of output and the Total Variable Cost with the optimal method of technology utilized at each output.

Output TVC

0 0

1 12

2 18

3 24

C o S T $

Units of Output

0 1 2 3

8

16

24