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

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 = increaseintotaloutputincreaseinoutput\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
  • 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 = increaseintotaloutputincreaseinoutput\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