Output and Costs

Sessions 9-10:
Short run Costs Total, Marginal and Average Cost
 Short-Run Cost
• To produce more output in the short run, a firm must employ more labour,
which means that it must increase its costs
Total Cost
• A firm’s total cost is the cost of all the factors of production it uses
• We separate total cost into total fixed cost and total variable cost
• Total fixed cost is the cost of the firm’s fixed factors
• Total variable cost is the cost of the firm’s variable factors
• Total cost is the sum of total fixed cost and total variable cost
Marginal Cost
• A firm’s marginal cost is the increase in total cost that results from a one-
unit increase in output
Average Cost
• Average fixed cost is total fixed cost per unit of output
• Average variable cost is total variable cost per unit of output
• Average total cost is total cost per unit of output

2 Economics 2ed: Global and Southern African Perspectives © 2013

 FIG UR E 11.3 Total C ost Curves C am pus S w eaters rents a knitting m achine for R100 a
day, so this cost is the firm ’s total fixed cost. T he firm hires

C ost (rand per day)

TC
w o rkers at a wage rate of R100 a day and this cost is its
to tal va ria ble co st. Fo r e xa m ple , in row D, C a m pu s S w e aters
TC = TFC + TVC
TVC
e m ploys 3 w o rkers and its total variable cost is 3 × R100,
which equ als R300. Total cost is the sum of total fixed
R 400
cost and total variable cost. F or exam ple, w hen Campus
S w eate rs e m ploys 3 w orke rs, total co st is R400 – total fixed
cost of R100 plus to tal va ria ble co st of R300.
R 200 T he graph sho w s C a m pu s S w ea ters’ total cost curves.
Total fixed cost is constant – the TFC curve is a horizontal
R 100 TFC line. Total variable cost increases as output increase s, so the
T V C curve and the T C curve increase as output increases.
0 4 13 The vertical distance betw een the TC curve and the TVC
Output (sw eaters per day) curve e quals to tal fixed co st, as illustrated by the two arrows.

Labour O utp ut Tota l fixed cost (TFC ) Tota l variable C o st Tota l cost (T C )
(w orkers per d a y) (sw e aters per d a y) (rand per da y) (T V C ) (rand per da y) (rand per da y)
A 0 0 100 0 100
B 1 4 100 100 200
C 2 9 100 200 300
D 3 13 100 300 400
E 4 16 100 400 500
F 5 18 100 500 600
G 6 18 100 600 700

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 Short-Run Cost
Marginal Cost and Average Cost
Look closely and you’ll see that the marginal cost curve (MC) intersects the
average variable cost curve and the average total cost curve at their minimum
points
• When marginal cost is less than
average cost, average cost is
decreasing, and when marginal cost
exceeds average cost, average cost
is increasing
• Average total cost is the sum of
average fixed cost and average
variable cost, so the shape of the
ATC curve combines the shapes of
the AFC and AVC curves
• The U shape of the ATC curve arises
from the influence of two opposing
forces:
• Spreading total fixed cost over a
larger output
• Eventually diminishing returns

5 Economics 2ed: Global and Southern African Perspectives © 2013

 Short-Run Cost and product curves
Cost Curves and Product Curves
• At the point of maximum average product, average variable cost is at a
minimum
• As labour increases further, output increases
• Average product diminishes and average variable cost increases

See diagram:

6 Economics 2ed: Global and Southern African Perspectives © 2013

 Comparing marginal product with marginal cost

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 Shifts in the Cost Curves

Technology
• A technological change that increases productivity increases the marginal product
and average product of labour
Prices of Factors of Production
• An increase in the price of a factor of production increases the firm’s costs and shifts
its cost curves
• How the curves shift depends on which factor price changes

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End of Part 3,
Sessions 9-10