# Short run cost

### Short run cost

#### Lessons

Total Cost

Total Cost (TC): the cost from all factors of production. The total cost is separated into two types of costs: total fixed cost, and total variable cost.

Total Fixed Cost (TFC): the costs that are independent of output. Examples would be rent, buildings, machinery.

Total Variable Cost (TVC): the costs that are dependent of output. Examples would be labor, wages, utilities.

TC = TFC + TVC Marginal Cost & Average Cost

Marginal Cost: the increase in total cost from a one-unit increase in output

Marginal cost is calculated by

Marginal cost = $\large \frac{increase\; in\; total\; output}{increase\; in\; output}$

Average cost is separated into 3 types.

Average Fixed Cost (AFC): the total fixed cost per unit of output.

AFC = $\frac{TFC}{Q}$

Average Variable Cost (AVC): the total variable cost per unit of output.

AVC = $\frac{TVC}{Q}$

Average Total Cost (AVC): the total cost per unit of output.

ATC = $\frac{TC}{Q}$ = AFC + AVC The U-shape from the ATC, AFC, and AVC curve is because of the following two influences:

1. Spreading total fixed cost over a larger output
2. Increase returns initially, and then diminishing returns afterwards

Shifts in Cost Curves

There are two factors can that can change the short-run cost curve:

1. Technology
2. Prices of factors of production

Technology: Technological advances lowers the cost of production and shifts the TC curve downward. In addition, it shifts the TFC curve up, and shifts the TVC curve down.

TC $\, \downarrow$, TFC $\, \uparrow$, and TVC $\, \downarrow$

Example: Advances to robot population shifts the TC curve downward. Since robots is considered a capital (Fixed factor), then the TFC shifts upward. Since less labor (variable factor) is used due to the robots, then the TVC shifts downward.

Prices of Factors of Production: An increase in prices of factor of production increases the cost, therefore shifting the TC curve up. However, other curves shift depending on the situation.

Case 1: An increase in rent (fixed factor) shifts the TFC and AFC curves upward, but leaves AVC, TVC, and MC curve unchanged.

TC $\, \uparrow$, TFC $\, \uparrow$, AFC $\, \uparrow$, but TVC, AVC, MC $\,$ unchange

Case 2: An increase in wages (variable factor) shifts the TVC, AVC, and MC curve upward, but leaves TFC and AFC curves unchanged.

TC $\, \uparrow$, TVC $\, \uparrow$, AVC $\, \uparrow$, MC $\, \uparrow$ but TFC, AFC, MC $\,$ unchange
• Introduction
Short Run Cost Overview:
a)
Total Cost
• Cost of all factors of production
• Separated into two types of costs
• Total fixed cost
• Total variable cost $\,$$\,$ TVC
• TC = TFC + TVC
• How it graphically looks

b)
Marginal Cost & Average Cost
• Marginal cost = $\large \frac{increase\; in\; total\; output}{increase\; in\; output}$
• Average fixed Cost: total fixed cost per unit of output
• Average Variable Cost: total variable cost per unit of output
• Average Total Cost: Total cost per unit of output
• ATC = AFC + AVC
• How it graphically looks
• Why are they U-Shaped?

c)
Shifts in Cost Curve
• Technological change lowers cost $\,$$\,$ shift total cost downward
• TC $\, \downarrow \,$, TFC $\, \uparrow \,$, and TVC $\, \downarrow \,$
• Increase in Factor of Production prices $\,$$\,$ shift total cost upward
• Case 1: TC $\, \uparrow \,$, TFC $\, \uparrow \,$, AFC $\, \uparrow \,$, but TVC, AVC, MC unchanged
• Case 2: TC $\, \uparrow \,$, TVC $\, \uparrow \,$, AVC $\, \uparrow \,$, MC $\, \uparrow \,$ but TFC, AFC unchanged