Short run cost
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Intros
Lessons
- 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
- Marginal Cost & Average Cost
- Marginal cost =
- 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?
- Shifts in Cost Curve
- Technological change lowers cost → shift total cost downward
- TC , TFC , and TVC
- Increase in Factor of Production prices → shift total cost upward
- Case 1: TC , TFC , AFC , but TVC, AVC, MC unchanged
- Case 2: TC , TVC , AVC , MC but TFC, AFC unchanged
Examples
Lessons
- 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. - Consider the following information:
Labor (workers)
Output (chocolate bars)
1
30
2
60
3
120
4
150
5
160
6
165
Suppose it costs $150 to hire a worker, and the total fixed cost is $200. Graph the TC, TFC, and TVC curve. - Calculating Average Total Cost, Fixed Cost, Variable Cost & MC
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. Calculate the ATC, AFC, TVC, and MC curve, and graph. - Understanding Shifts in Cost Curves
Suppose a firm rents a building, and the rent increases by $300. How would it impact the TC, TVC, TFC, ATC, AVC, AFC, and MC curve? - Suppose a firm decreases the wage of workers. How would it impact the TC, TVC, TFC, ATC, AVC, AFC, and MC curve?
Topic Notes
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.
Understanding Total Costs in the Short Run
In economics, understanding total costs in the short run is crucial for businesses to make informed decisions about production and pricing. Total costs represent the sum of all expenses incurred by a firm to produce a given quantity of output. In the short run, these costs are divided into two main categories: total fixed costs (TFC) and total variable costs (TVC).
Total fixed costs (TFC) are expenses that remain constant regardless of the level of output produced. These costs do not change with production volume and must be paid even if the firm produces nothing. Examples of fixed costs include rent for facilities, insurance premiums, property taxes, and salaries of permanent staff. For instance, a factory must pay rent for its building whether it produces 100 units or 1000 units of a product.
On the other hand, total variable costs (TVC) are expenses that change directly with the level of output. These costs increase as production increases and decrease as production decreases. Examples of variable costs include raw materials, direct labor wages, utilities, and packaging materials. For example, if a bakery produces more loaves of bread, it will need to purchase more flour, yeast, and other ingredients, resulting in higher variable costs.
The relationship between total costs in the short run and output is represented by the equation: Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC). As output increases, TFC remains constant while TVC rises, causing TC to increase. This relationship is crucial for understanding how costs behave at different levels of production.
When graphing these costs, the x-axis typically represents the quantity of output, while the y-axis represents the cost in monetary units. The TFC curve appears as a horizontal line parallel to the x-axis, reflecting its constant nature regardless of output. The TVC curve starts at the origin and slopes upward, often with a changing slope due to factors like economies of scale or diminishing returns. The TC curve is derived by vertically adding the TFC and TVC curves at each level of output.
Interpreting these cost curves provides valuable insights for business decision-making. The shape of the TVC curve can indicate whether a firm is experiencing increasing, constant, or decreasing returns to scale. A steeper TVC curve suggests that costs are rising more rapidly with each additional unit of output, which might indicate decreasing returns to scale. Conversely, a flattening TVC curve could suggest economies of scale, where the cost per unit decreases as production increases.
The TC curve's shape reflects the combined effect of fixed and variable costs. Its slope at any point represents the marginal cost the cost of producing one additional unit of output. Understanding this relationship helps firms determine optimal production levels and pricing strategies.
It's important to note that while TFC remains constant in the short run, it can change in the long run as firms adjust their scale of operations. For example, a company might lease additional space or purchase new equipment, which would increase its fixed costs but potentially allow for greater production efficiency.
Managers and economists use these cost concepts and curves to analyze break-even points, determine profit-maximizing output levels, and make decisions about scaling production. By understanding how total costs behave in relation to output, businesses can optimize their operations and improve their competitive position in the market.
In conclusion, total costs in the short run are a fundamental concept in economics and business management. By breaking down costs into fixed and variable components and analyzing their relationship to output through cost curves, firms can gain valuable insights into their production processes and make informed decisions to maximize efficiency and profitability.
Average Costs: Fixed, Variable, and Total
Understanding average costs is crucial for businesses to make informed decisions about production and pricing strategies. This article delves into three key types of average costs: average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC). We'll explore their definitions, formulas, and the characteristic U-shaped nature of their curves.
Average Fixed Cost (AFC) represents the fixed costs per unit of output. Fixed costs remain constant regardless of production levels, such as rent, insurance, and salaries of permanent staff. The formula for AFC is:
AFC = Total Fixed Costs / Quantity Produced
As production increases, AFC decreases because the fixed costs are spread over a larger number of units. This results in a downward-sloping curve for AFC.
Average Variable Cost (AVC) is the variable cost per unit of output. Variable costs change with production levels and include materials, direct labor, and utilities. The formula for AVC is:
AVC = Total Variable Costs / Quantity Produced
Initially, AVC may decrease as production increases due to increasing returns to scale. However, it eventually rises as diminishing returns set in.
Average Total Cost (ATC) combines both fixed and variable costs per unit of output. It's calculated using the formula:
ATC = (Total Fixed Costs + Total Variable Costs) / Quantity Produced
Alternatively, ATC can be expressed as the sum of AFC and AVC:
ATC = AFC + AVC
The U-shaped nature of these cost curves, particularly ATC and AVC, is a fundamental concept in microeconomics. This shape is the result of the interplay between increasing and diminishing returns to scale.
In the initial stages of production, as output increases, both ATC and AVC tend to decrease. This is due to increasing returns to scale, where each additional unit of input leads to a more than proportional increase in output. Factors contributing to increasing returns include:
- Specialization and division of labor
- Economies of scale in purchasing inputs
- More efficient use of machinery and equipment
However, as production continues to expand, the firm eventually experiences diminishing returns to scale. This occurs when each additional unit of input leads to a less than proportional increase in output. Reasons for diminishing returns include:
- Limitations in management's ability to coordinate larger operations
- Increased complexity in communication and decision-making
- Constraints on physical space or resources
The combination of these factors results in the characteristic U-shape of the ATC and AVC curves. The ATC curve is U-shaped because it's influenced by both the downward-sloping AFC curve and the U-shaped AVC curve.
Understanding these cost curves is essential for businesses to optimize their production levels and maximize profits. The point at which ATC reaches its minimum represents the most efficient scale of production. At this point, the firm is operating at its optimal capacity, balancing the benefits of increasing returns with the challenges of diminishing returns.
Managers can use these cost concepts to make strategic decisions:
- Determining the optimal production level
- Setting prices to cover costs and generate profit
- Evaluating whether to expand or contract operations
- Assessing the impact of changes in fixed or variable costs
In conclusion, average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC) are fundamental concepts in cost analysis. Their U-shaped curves reflect the complex interplay of increasing and diminishing returns in the production process. By understanding these relationships, businesses can make more informed decisions about their operations, pricing strategies, and long-term planning. As markets evolve and competition intensifies, a thorough grasp of these cost concepts becomes increasingly vital for maintaining a competitive
Marginal Cost and its Relationship to Average Costs
Marginal cost is a fundamental concept in economics and business that plays a crucial role in decision-making processes. It refers to the additional cost incurred by producing one more unit of a good or service. Understanding marginal cost and its relationship to average cost curves is essential for businesses to optimize their production and pricing strategies.
To calculate marginal cost, you need to determine the change in total cost that results from producing one additional unit. The formula for marginal cost is:
Marginal Cost = Change in Total Cost / Change in Quantity Produced
For example, if a company's total cost increases from $1000 to $1200 when production increases from 100 to 101 units, the marginal cost would be:
Marginal Cost = ($1200 - $1000) / (101 - 100) = $200
This means it costs the company an additional $200 to produce the 101st unit.
The relationship between marginal cost and average cost curves is intricate and provides valuable insights into a firm's production efficiency. Average cost curves include the average total cost (ATC), average variable cost (AVC), and average fixed cost (AFC). The marginal cost curve intersects both the ATC and AVC curves at their minimum points, which is a significant economic principle.
When marginal cost is below the average total cost, producing an additional unit will lower the average cost per unit. Conversely, when marginal cost exceeds the average total cost, producing more will increase the average cost per unit. This relationship is crucial for businesses to determine their optimal production level.
The point where marginal cost intersects the average variable cost curve is known as the shutdown point. At this point, a firm is indifferent between continuing production and shutting down in the short run. If the price falls below this point, the firm should consider ceasing operations temporarily as it cannot cover its variable costs.
The intersection of marginal cost with average total cost represents the break-even point. At this point, the firm is covering all its costs (fixed and variable) but not making any profit. Any production beyond this point, where price exceeds average total cost, results in profit for the firm.
To illustrate these concepts, let's consider a bakery producing cupcakes. Initially, as the bakery increases production, it may experience decreasing marginal costs due to economies of scale. For instance, the marginal cost of producing the 10th cupcake might be $2, while the 20th cupcake costs only $1.50 to produce.
However, as production continues to increase, the bakery may face increasing marginal costs due to factors like overtime wages or the need for additional equipment. The 100th cupcake might now cost $2.50 to produce. This progression forms the typical U-shaped marginal cost curve.
Suppose the average total cost per cupcake is $2 when producing 50 cupcakes. If the marginal cost of the 51st cupcake is $1.90, it will bring down the average total cost. However, if the marginal cost of the 60th cupcake rises to $2.10, it will start pushing the average total cost up.
Understanding these relationships allows the bakery to determine its optimal production level. If the market price for cupcakes is $2.05, the bakery should produce up to the point where its marginal cost equals this price, maximizing its profits.
In conclusion, marginal cost is a vital metric that helps businesses make informed decisions about production levels and pricing strategies. Its relationship with average cost curves provides crucial insights into a firm's efficiency and profitability. By carefully analyzing these cost relationships, businesses can optimize their operations, determine break-even points, and make sound decisions about continuing or ceasing production in various market conditions.
Graphing Short Run Cost Curves
Understanding how to graph short run cost curves is essential for students of economics. This comprehensive guide will walk you through the process of graphing Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC) curves together. We'll explore their shapes, positions, and relationships, providing valuable insights into graph interpretation and tips for remembering these crucial concepts.
Let's begin with the basics. To graph the short run cost curves, we'll use a coordinate system with quantity (Q) on the x-axis and cost on the y-axis. Each curve represents a different aspect of a firm's costs in the short run.
1. Average Fixed Cost (AFC) Curve: Start by plotting the AFC curve. This curve is hyperbolic, starting high and decreasing as quantity increases. It never touches either axis, approaching them asymptotically. The AFC curve represents fixed costs spread over increasing units of output.
2. Average Variable Cost (AVC) Curve: Next, plot the AVC curve. This U-shaped curve initially decreases as quantity increases due to increasing returns to scale, then reaches a minimum point before rising due to diminishing returns. The AVC curve represents variable costs per unit of output.
3. Average Total Cost (ATC) Curve: The ATC curve is the vertical sum of AFC and AVC. It's also U-shaped but lies above the AVC curve at all points. The distance between ATC and AVC decreases as quantity increases, reflecting the diminishing impact of fixed costs.
4. Marginal Cost (MC) Curve: Finally, add the MC curve. This curve intersects both AVC and ATC at their minimum points. The MC curve is U-shaped, initially decreasing then increasing as output expands. It represents the cost of producing one additional unit of output.
When interpreting the graph, several key points emerge:
- The MC curve intersects AVC and ATC at their lowest points, indicating the quantity at which average costs are minimized.
- When MC is below ATC, ATC is decreasing. When MC is above ATC, ATC is increasing.
- The gap between ATC and AVC represents AFC, which decreases as quantity increases.
- The minimum point of ATC represents the most efficient level of production in the short run.
To remember the positions and relationships of these curves, consider these mnemonics and tips:
1. "AFC Always Falls": The AFC curve always slopes downward, never touching the axes.
2. "U Can Do It": AVC, ATC, and MC are all U-shaped curves.
3. "Marginal Crosses Minimums": MC intersects AVC and ATC at their lowest points.
4. "ATC Tops AVC": The ATC curve is always above the AVC curve.
5. "MC Makes the Move": When MC is below ATC, ATC falls; when MC is above ATC, ATC rises.
Understanding these cost curve graphs is crucial for analyzing a firm's production decisions in the short run. They provide insights into economies of scale, optimal production levels, and cost minimization strategies. By visualizing how different costs change with output, students can better grasp the economic principles governing firm behavior.
When practicing, start by sketching the AVC curve, then add the MC curve, ensuring it intersects AVC at its minimum. Next, draw the ATC curve above AVC, with MC intersecting it at its minimum. Finally, add the hyperbolic AFC curve. Regular practice in drawing these curves will reinforce your understanding of their relationships and shapes.
Remember, the short run is defined as a period where at least one factor of production is fixed. This is reflected in the presence of the AFC curve. In the long run, all costs become variable, and the AFC curve disappears from the graph.
By mastering the art of graphing and interpreting short run cost curves, you'll gain a powerful tool for economic analysis. These graphs serve as a foundation for understanding more complex economic concepts
Shifts in Short Run Cost Curves
Understanding the factors that cause shifts in short run cost curves is crucial for businesses to make informed production decisions. Two primary drivers of these shifts are technological changes and alterations in factor prices. These elements can significantly impact a firm's total, average, and marginal cost curves, ultimately affecting its production strategy and profitability.
Technological changes are a major catalyst for shifts in cost curves. When a company adopts new technology or improves existing processes, it often leads to increased efficiency and productivity. This typically results in a downward shift of the total cost curve, as the firm can produce the same output at a lower cost. Consequently, both the average cost and marginal cost curves also shift downward. For example, if a manufacturing company implements an advanced robotics system, it may be able to produce goods faster and with fewer errors, reducing labor costs and material waste. This technological advancement would cause a downward shift in all cost curves, allowing the firm to produce more efficiently.
Changes in factor prices, such as the cost of labor, raw materials, or capital, also play a significant role in shifting cost curves. An increase in factor prices generally leads to an upward shift in the total cost curve, as it becomes more expensive to produce the same level of output. This, in turn, causes the average cost and marginal cost curves to shift upward as well. For instance, if the price of steel rises significantly, a car manufacturer would experience higher production costs, shifting its cost curves upward. Conversely, a decrease in factor prices would result in downward shifts of the cost curves, making production less expensive.
It's important to note that the magnitude of these shifts can vary depending on the specific cost curve and the nature of the change. For example, a technological improvement that primarily affects fixed costs (such as investing in more efficient machinery) would have a more pronounced effect on the average fixed cost curve than on the marginal cost curve. On the other hand, changes in variable factor prices (like labor or raw materials) would have a more immediate impact on the marginal cost curve.
To illustrate, consider a textile company that invests in a new, energy-efficient production line. This technological change would likely cause a significant downward shift in the total cost curve and the average cost curve, especially at higher levels of output. The marginal cost curve might also shift downward, but potentially to a lesser extent if the primary savings are in fixed costs. Alternatively, if the price of cotton (a key input) were to decrease, the company would see a downward shift in its total cost curve, with the most noticeable impact on the marginal cost curve, as each additional unit of production would now cost less to produce.
These shifts in cost curves have important implications for a firm's production decisions. When cost curves shift downward due to technological improvements or decreases in factor prices, firms often find it profitable to increase their production levels. This is because the lower costs allow them to produce more units before reaching the point where marginal cost equals marginal revenue (the profit-maximizing level of output). Conversely, when cost curves shift upward, firms may need to reassess their production levels and potentially reduce output to maintain profitability.
Moreover, shifts in cost curves can affect a firm's competitive position in the market. Companies that experience downward shifts in their cost curves may gain a competitive advantage, as they can potentially lower prices while maintaining profitability. This could lead to increased market share and potentially force competitors to also seek cost-reducing measures to remain competitive.
In conclusion, shifts in short run cost curves, primarily driven by technological changes and alterations in factor prices, have far-reaching effects on a firm's production economics. These shifts not only impact the total, average, and marginal cost curves but also influence crucial production decisions and market competitiveness. By understanding and anticipating these shifts, businesses can make more informed decisions about production levels, pricing strategies, and investments in technology or resource procurement. This knowledge is essential for maintaining profitability and achieving long-term success in dynamic market environments.
Conclusion and Practical Applications
Understanding short run cost curves is crucial for effective business decision-making. As demonstrated in the introductory video, these curves illustrate how costs change with production levels in the short term. Key concepts include fixed costs, variable costs, and the relationships between average and marginal costs. Grasping these principles enables managers to optimize production, set prices, and make informed choices about resource allocation. In practice, businesses can use short run cost curves to determine optimal output levels, identify economies of scale, and forecast profitability. By applying these concepts to real-world scenarios, decision-makers can enhance operational efficiency and strategic planning. For instance, a manufacturer might use cost curve analysis to decide whether to increase production or outsource during peak demand. As you continue exploring economic analysis, remember that short run cost curves are fundamental tools for understanding market dynamics and competitive positioning. We encourage you to apply these insights to your own business contexts and delve deeper into related economic concepts.
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
Step 1: Understanding Total Cost
Total cost in the short run encompasses all the costs associated with the factors of production. This includes any expenditure that contributes to the production process. Essentially, if it costs money, it is part of the total cost. In the short run, these costs are all the expenses a firm incurs to produce goods or services.
Step 2: Types of Costs
Total cost is divided into two main types: total fixed cost (TFC) and total variable cost (TVC). Understanding these two types is crucial for analyzing short-run costs.
Step 3: Total Fixed Cost (TFC)
Total fixed cost (TFC) refers to costs that do not change with the level of output. These costs remain constant regardless of how much or how little is produced. Examples include rent, buildings, and machinery. For instance, if a company rents a building for $1,000 per month, this cost remains the same whether the company produces 20 units or 70 units.
Step 4: Total Variable Cost (TVC)
Total variable cost (TVC) varies with the level of output. These costs increase as production increases and decrease as production decreases. Examples include labor, wages, and utilities. For example, if producing 10 units requires 2 hours of labor costing $20, producing 50 units might require 5 hours of labor costing $50. Thus, TVC is directly dependent on the level of output.
Step 5: Calculating Total Cost (TC)
Total cost (TC) is the sum of total fixed cost (TFC) and total variable cost (TVC). The formula is:
TC = TFC + TVC
By adding the fixed and variable costs, we get the total cost of production at any given level of output.
Step 6: Graphical Representation
Graphically, total fixed cost (TFC) is represented as a horizontal line because it remains constant regardless of the output level. For example, if TFC is $20, it stays at $20 whether the output is 2, 4, 6, or 10 units.
Total variable cost (TVC) is represented as an upward-sloping curve. This curve shows that as output increases, the total variable cost also increases. For instance, at 4 units of output, TVC might be $10, at 8 units it might be $30, and at 10 units it might be $50.
The total cost (TC) curve is derived by adding the TFC and TVC at each level of output. For example, if at 4 units of output, TFC is $20 and TVC is $10, then TC is $30. This process is repeated for all levels of output to plot the TC curve, which will be higher than both the TFC and TVC curves.
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.
Prerequisite Topics
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.
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.
Marginal Cost & Average Cost
Marginal Cost: the increase in total cost from a one-unit increase in output
Marginal cost is calculated by
Average cost is separated into 3 types.
Average Fixed Cost (AFC): the total fixed cost per unit of output.
Average Variable Cost (AVC): the total variable cost per unit of output.
Average Total Cost (AVC): the total cost per unit of output.
The U-shape from the ATC, AFC, and AVC curve is because of the following two influences:
- Spreading total fixed cost over a larger output
- 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:
- Technology
- 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.
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.
Case 2: An increase in wages (variable factor) shifts the TVC, AVC, and MC curve upward, but leaves TFC and AFC curves unchanged.