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ECO 240ECO 240 --66 Reading: SLO ChapterReading: SLO Chapter 55Costs and Output DecisionsCosts and Output DecisionsCosts in the Short RunCosts in the Short Run
Short runShort run:
 A period of time so short that some of the firm’sinputs are fixed in total supply.There are several ways to categorize short-run costs...
Fixed Costs (FC)Fixed Costs (FC)
 Any cost that a firm bears in the short run that does not depend onits level of output ...Sometimes called sunk costs sunk costs because firms have no control over fixed costs in the short run
Variable Costs (VC)Variable Costs (VC)
Variable costs are any costs that a firm bears that depends on the level  of production chosen.
The TFC, TVC, and TC CurvesThe TFC, TVC, and TC Curves
TVC
Units of output
   C  o  s   t  s
TCTFC
Total Costs (TC)Total Costs (TC)
Total Costs = Total Fixed Costs+ Total Variable Costs
TC = TFC + TVCTC = TFC + TVC
 
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Average Fixed CostsAverage Fixed Costs
AFC= Total Fixed Costsquantity of output
Average Variable CostsAverage Variable Costs
AVC= Total Variable Costsquantity of output
Average Total CostsAverage Total Costs
ATC= Total Costsquantity of outputATC= AFC + AVC
Average CostsAverage Costs
ATC= Total Costsquantity of outputATC= AFC + AVC
AVC= Total Variable Costsquantity of outputAFC= Total Fixed Costsquantity of output
Marginal Costs (MC)Marginal Costs (MC)
 Marginal costs Marginal costsrepresent theincrease in total cost that results from producing one more unit of  output Marginal costs reflect changesin variable costs
.
The marginal cost curve is closelyThe marginal cost curve is closelyrelated to the marginal product curve:related to the marginal product curve:
Units of labor
   M  a  r  g   i  n  a   l  p  r  o   d  u  c   t   M  a  r  g   i  n  a   l  c  o  s   t   (    $   )
Units of output
 
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 When marginal product begins to When marginal product begins tofall, marginal cost begins to rise:fall, marginal cost begins to rise:
Units of labor
   M  a  r  g   i  n  a   l  p  r  o   d  u  c   t   M  a  r  g   i  n  a   l  c  o  s   t   (    $   )
Units of outputDiminishingreturnsset in.Diminishingreturnsset in.
Given the law of diminishing returns, the totalGiven the law of diminishing returns, the totalvariable cost curve has a distinctive shape:variable cost curve has a distinctive shape:
TVC
Units of output
   T  o   t  a   l  v  a  r   i  a   b   l  e  c  o  s   t  s
Diminishingreturnsset in whereTVC beginsto increaseat anincreasingrate.
Given the law of diminishing returns, the totalGiven the law of diminishing returns, the totalvariable cost curve has a distinctive shape:variable cost curve has a distinctive shape:
TVC
Units of output
   T  o   t  a   l  v  a  r   i  a   b   l  e  c  o  s   t  s
Marginal costsare minimized atthis level of output.
Total fixed costs are constant atTotal fixed costs are constant atevery level of output...every level of output...
   T  o   t  a   l  v  a  r   i  a   b   l  e  c  o  s   t  s
Units of output
TVCTFC
0204060801000 1 2 3 4 5 6 7 8
TC 
Output(Q)01234567
TFC 
(£)1212121212121212
TVC 
(£)010162128406091
TC 
(£)12222833405272103
TVC TFC 
Total costs for firm XTotal costs for firm X
0204060801000 1 2 3 4 5 6 7 8
TC TVC TFC 
Diminishing marginalreturns set in here
Total costs for firm XTotal costs for firm X
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