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Understanding Short Run Cost Curves: A Comprehensive Guide
Dive into the world of short run cost curves and unlock crucial insights for business strategy. Learn how total, average, and marginal costs shape economic decisions and drive efficiency in production.

  1. Intros0/3 watched
  2. Examples0/5 watched
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Now Playing:Short run cost – Example 0a
Intros
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  1. Short Run Cost Overview:
  2. Short Run Cost Overview:
    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
  3. Short Run Cost Overview:
    Marginal Cost & Average Cost
    • Marginal cost = increase  in  total  outputincrease  in  output\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?
Examples
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  1. Graphing Total Cost, Total Fixed Cost, & Total Variable Cost
    Consider the following information:

    Labor (workers)

    Output (chocolate bars)

    1

    20

    2

    50

    3

    100

    4

    120

    5

    130

    6

    135


    Suppose it costs $100 to hire a worker, and the total fixed cost is $200. Graph the TC, TFC, and TVC curve.
    Short run cost
    Jump to:NotesConceptFAQsPrerequisites
    Notes
    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

    Total cost curve

    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 = increase  in  total  outputincrease  in  output\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 = TFCQ\frac{TFC}{Q}

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


    AVC = TVCQ\frac{TVC}{Q}

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


    ATC = TCQ\frac{TC}{Q} = AFC + AVC

    Average cost curve

    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
    Concept

    Introduction to Short Run Cost Curves

    Short run cost curves are essential tools in understanding a firm's production decisions and efficiency. Our introduction video provides a crucial foundation for grasping these concepts, making it an invaluable starting point for students and professionals alike. This article delves into the intricacies of short run costs, covering key components such as total costs, average costs, and marginal costs. We'll explore how these elements interact and influence a firm's decision-making process in the short run. Additionally, we'll examine the factors that can cause shifts in cost curves, providing a comprehensive understanding of how external forces impact a company's cost structure. By mastering these concepts, readers will gain valuable insights into microeconomic principles and their practical applications in business strategy. Whether you're a student preparing for exams or a business professional seeking to optimize operations, this exploration of short run cost curves will equip you with essential knowledge for success.

    FAQs

    Here are some frequently asked questions about short run cost curves:

    1. What is the difference between short run and long run cost curves?

    Short run cost curves include fixed costs and variable costs, with at least one factor of production being fixed. Long run cost curves assume all factors of production are variable. Short run curves typically show U-shaped average cost curves, while long run curves are often L-shaped due to economies of scale.

    2. Why are short run cost curves U-shaped?

    Short run cost curves are U-shaped due to the law of diminishing returns. Initially, as production increases, average costs decrease due to spreading fixed costs and increasing efficiency. However, beyond a certain point, costs start to rise as factors like labor become less efficient, resulting in the characteristic U-shape.

    3. What causes shifts in short-run cost curves?

    Short-run cost curves can shift due to changes in factor prices (e.g., wages, raw material costs) or technological improvements. An increase in input prices shifts curves upward, while technological advancements typically shift curves downward, reflecting improved efficiency.

    4. What is the relationship between marginal cost and average cost curves?

    The marginal cost curve intersects both the average variable cost and average total cost curves at their minimum points. When marginal cost is below average cost, the average cost is decreasing. When marginal cost is above average cost, the average cost is increasing.

    5. How do businesses use short run cost curves in decision-making?

    Businesses use short run cost curves to determine optimal production levels, set prices, and make decisions about resource allocation. They help in identifying the most efficient scale of production, understanding break-even points, and analyzing how changes in production levels affect costs and profitability.

    Prerequisites

    Understanding short run cost is a crucial concept in economics and business management. While there are no specific prerequisite topics listed for this subject, it's important to recognize that a solid foundation in basic economic principles and cost analysis can greatly enhance your comprehension of short run cost. Familiarizing yourself with fundamental economic concepts and cost-related terminology will provide you with the necessary context to grasp the intricacies of short run cost analysis.

    Short run cost refers to the economic costs a firm faces over a period where at least one factor of production is fixed. To fully appreciate this concept, it's beneficial to have a good understanding of general economic principles, such as supply and demand, market structures, and the basics of production theory. These foundational topics provide the framework within which short run cost analysis operates.

    Additionally, having a grasp on basic accounting principles and cost classification can be immensely helpful. Understanding the difference between fixed and variable costs, for instance, is crucial when analyzing short run costs. Fixed costs remain constant regardless of production levels, while variable costs change with output. This distinction is fundamental to short run cost analysis.

    Moreover, familiarity with graphical representations and basic mathematical concepts can aid in interpreting short run cost curves. These curves, such as the average total cost curve, average variable cost curve, and marginal cost curve, are essential tools in visualizing and analyzing short run costs. A basic understanding of algebra and graph interpretation can make these concepts more accessible.

    While not strictly prerequisites, knowledge of related economic concepts like economies of scale, diminishing returns, and opportunity cost can provide valuable context for understanding short run cost. These concepts often interplay with short run cost analysis, offering a more comprehensive view of a firm's economic decision-making process.

    It's also worth noting that an understanding of the difference between short run and long run in economic terms can enhance your grasp of short run cost. The short run is defined as a period where at least one factor of production is fixed, typically capital, while in the long run, all factors become variable. This distinction is crucial for understanding why and how short run cost analysis differs from long-term cost considerations.

    In conclusion, while there are no specific prerequisites listed for studying short run cost, a solid foundation in basic economic principles, cost accounting, and mathematical interpretation can significantly enhance your understanding of this topic. By building a strong base in these areas, you'll be better equipped to delve into the complexities of short run cost analysis and its applications in real-world economic scenarios.