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Short run cost

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Intros
Lessons
  1. Short Run Cost Overview:
  2. 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. 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?
  4. 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
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Examples
Lessons
  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.
    1. 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.
      1. 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.
        1. 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?
          1. Suppose a firm decreases the wage of workers. How would it impact the TC, TVC, TFC, ATC, AVC, AFC, and MC curve?
            Topic Notes
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            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