7/29/2019 Cost2 Final
1/41
Short Run Costs
Part 2
7/29/2019 Cost2 Final
2/41
The Costs of Production
There are many different types of costs.
Invariably, firms believe costs are too high
and try to lower them.
7/29/2019 Cost2 Final
3/41
Fixed Costs, Variable Costs,and Total Costs
Fixed costs are those that are spent andcannot be changed in the period of timeunder consideration.
In the long run there are no fixed costs since allcosts are variable.
In the short run, a number of costs will be fixed.
7/29/2019 Cost2 Final
4/41
Fixed Costs, Variable Costs,and Total Costs
Workers represent variable costs thosethat change as output changes.
7/29/2019 Cost2 Final
5/41
Fixed Costs, Variable Costs,and Total Costs
The sum of the variable and fixed costs aretotal costs.
TC = FC + VC
7/29/2019 Cost2 Final
6/41
Average Costs
Much of the firms discussion is of average
cost.
7/29/2019 Cost2 Final
7/41
Average Costs
Average fixed cost equals fixed cost dividedby quantity produced.
AFC = FC/Q
7/29/2019 Cost2 Final
8/41
Average Costs
Average variable cost equals variable costdivided by quantity produced.
AVC = VC/Q
7/29/2019 Cost2 Final
9/41
Average Costs
Average total cost can also be thought of asthe sum of average fixed cost and averagevariable cost.
ATC = AFC + AVC
7/29/2019 Cost2 Final
10/41
Average Total Costs
Average total cost (ATC):the per unit cost derived bydividing total cost by thequantity of output.
Plotting the cost on thevertical axis and quantity ofoutput on the horizontal axisgenerates the ATC curve. outputtotal
costtotalATC
7/29/2019 Cost2 Final
11/41
The Costs of Production
Fixed costs (FC)are those that are spent and cannot bechanged in the period of time under consideration
In the long run, there are no fixed costs since allinputs (and therefore their costs) are variable
In the short run, a number of inputs and their costswill be fixed
Workers are an example ofvariable costs (VC)which arecosts that change as output changes
The sum of the variable and fixed costs are total costs (TC)
TC = FC + VC
12-11
7/29/2019 Cost2 Final
12/41
The Costs of Production
Average fixed costs (AFC) equals fixed cost dividedby quantity produced,AFC = FC/Q
Marginal cost (MC)is the increase in total cost whenoutput increases by one unit, MC = TC/Q
Average variable costs (AVC) equals variable costdivided by quantity produced,AVC = VC/Q
Average total costs (ATC) equals total cost divided byquantity produced,ATC = TC/Q orATC = AFC + AVC
12-12
7/29/2019 Cost2 Final
13/41
Average Total Costs
7/29/2019 Cost2 Final
14/41
Marginal Cost
Marginal cost is the increase (decrease) intotal cost of increasing (or decreasing) thelevel of output by one unit.
In deciding how many units to produce, themost important variable is marginal cost.
7/29/2019 Cost2 Final
15/41
Marginal Costs
Marginal cost (MC): the change incost caused by a change in output,derived by dividing the change intotal cost by the change in the
quantity of output.
outputofquantityinchange
costin totalchangeMC
7/29/2019 Cost2 Final
16/41
The Cost of Producing Earrings
Output FC VC TC MC AFC AVC ATC
3 50 38 88 16.67 12.66 29.33
4 50 50 100 12 12.50 12.50 25.00
9 50 100 150 5.56 11.11 16.67
10 50 108 158 8 5.00 10.80 15.80
16 50 150 200 3.13 9.38 12.50
17 50 157 207 7 2.94 9.24 12.18
22 50 200 250
2.27 9.09 11.3623 50 210 260 10 2.17 9.13 11.30
27 50 255 305 1.85 9.44 11.30
28 50 270 320 15 1.79 9.64 11.42
7/29/2019 Cost2 Final
17/41
Graphing Cost Curves
To gain a greater understanding of theseconcepts, it is a good idea to draw a graph.
Quantity is put on the horizontal axis and adollar measure of various costs on thevertical axis.
7/29/2019 Cost2 Final
18/41
Total Cost Curves
The total variable cost curve has the sameshape as the total cost curveincreasingoutput increases variable cost.
7/29/2019 Cost2 Final
19/41
Totalcos
t
$400
350
300
250
200
150
10050
0
FC
2 4
M
6 8 10 20 30Quantity of earrings
VCTC
L
Total Cost Curves
O
TC = (VC + FC)
7/29/2019 Cost2 Final
20/41
Total Cost Curves
Totalco
st
$400
350
300
250
200
150
10050
0
FC
2 4
M
6 8 10 20 30
Quantity of earrings
VCTC
L
O
TC = VC + FC
7/29/2019 Cost2 Final
21/41
Average and Marginal CostCurves
The marginal cost curve goes through theminimum point of the average total cost curveand average variable cost curve.
Each of these curves is U-shaped.
7/29/2019 Cost2 Final
22/41
Average and Marginal CostCurves
The average fixed cost curve slopes downcontinuously.
7/29/2019 Cost2 Final
23/41
Downward-Sloping Shape ofthe Average Fixed Cost Curve
The average fixed cost curve looks like achilds slide it starts out with a steepdecline, then it becomes flatter and flatter.
It tells us that as output increases, the samefixed cost can be spread out over a widerrange of output.
7/29/2019 Cost2 Final
24/41
The U Shape of the Averageand Marginal Cost Curves
When output is increased in the short-run, itcan only be done by increasing the variableinput.
7/29/2019 Cost2 Final
25/41
The U Shape of the Averageand Marginal Cost Curves
The law of diminishing marginal productivitysets in as more and more of a variable inputis added to a fixed input.
Marginal and average productivities fall andmarginal costs rise.
7/29/2019 Cost2 Final
26/41
The U Shape of the Averageand Marginal Cost Curves
And when average productivity of the variableinput falls, average variable cost rise.
7/29/2019 Cost2 Final
27/41
The U Shape of the Averageand Marginal Cost Curves
The average total cost curve is the verticalsummation of the average fixed cost curveand the average variable cost curve.
7/29/2019 Cost2 Final
28/41
The U Shape of the Averageand Marginal Cost Curves
If the firm increased output enormously, theaverage variable cost curve and the averagetotal cost curve would almost meet.
The firms eye is focused on average total
costit wants to keep it low.
7/29/2019 Cost2 Final
29/41
Cost
$3028262422201816141210
8
642
0Quantity of earrings
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32
Per Unit Output Cost Curves
AFC
AVCATCMC
7/29/2019 Cost2 Final
30/41
Per Unit Output Cost Curves
Cost
$3028262422201816141210
8
642
0
Quantity of earrings
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32
AFC
AVCATCMC
7/29/2019 Cost2 Final
31/41
Relationship Between Marginal andAverage Costs
The marginal cost and average cost curvesare related.
When marginal cost exceeds average cost,
average cost must be rising.
When marginal cost is less than average cost,average cost must be falling.
7/29/2019 Cost2 Final
32/41
Average and Marginal Costs
7/29/2019 Cost2 Final
33/41
Relationship Between Marginaland Average Costs
Marginal cost curves always intersectaverage cost curves at the minimum of theaverage cost curve.
7/29/2019 Cost2 Final
34/41
Relationship Between Marginaland Average Costs
The position of the marginal cost relative toaverage total cost tells us whether averagetotal cost is rising or falling.
7/29/2019 Cost2 Final
35/41
IfMC > ATC, then ATC is rising
IfMC > AVC, then AVC is rising
IfMC < ATC, then ATC is falling
IfMC < AVC, then AVC is falling
IfMC = AVC and MC = ATC, then AVCand ATC are at their minimum points
The Relationship BetweenMarginal Cost and Average Cost
12-35
7/29/2019 Cost2 Final
36/41
The Relationship BetweenMarginal Cost and Average Cost
AVC
MC
Q
Costsper unit
ATC The marginal cost curvegoes through theminimum point of both
the ATC and AVC curves
12-36
7/29/2019 Cost2 Final
37/41
Relationship Between Marginaland Average Costs
To summarize:
If MC > ATC, then ATC is rising.
If MC = ATC, then ATC is at its low point.
If MC < ATC, then ATC is falling.
7/29/2019 Cost2 Final
38/41
Relationship Between Marginaland Average Costs
Marginal and average total cost reflect ageneral relationship that also holds formarginal cost and average variable cost.
If MC > AVC, then AVC is rising.
If MC = AVC, then AVC is at its low point.
If MC < AVC, then AVC is falling.
R l i hi B M i l
7/29/2019 Cost2 Final
39/41
Relationship Between Marginaland Average Costs
As long as average variable cost does notrise by more than average fixed cost falls,average total cost will fall when marginal cost
is above average variable cost,
R l i hi B M i l d
7/29/2019 Cost2 Final
40/41
Relationship Between Marginal andAverage Costs
$90
80
70
6050
4030
2010
0Quantity
Area B
Area A Area CMC
ATC
AVC
1 2 3 4 5 6 7 8 9
Q1
B
AVC
ATC
MCQ0A
7/29/2019 Cost2 Final
41/41
Definition of Costs
Total Costs (TC) -- the expenses a business
has in supplying goods and/or services. Total Fixed Costs (TFC) -- payments to
resources whose quantities can not be changedduring a fixed period of time the short run.
Total Variable Costs (TVC) -- payments foradditional resources used as output increases. Average Fixed Cost -- the total fixed cost
divided by total output.
Average total Cost (SRATC): -- the total cost ofproduction divided by the total quantity of outputproduced when at least one resource is fixed
Average Variable Cost -- total variable costdivided by total output
Top Related