⏱️ November 15, 2020
In this section, we will address all the short-run costs associated with production. In the short-run, at least 1 resource is fixed, or cannot change. Fixed resources can include plant capacity, or the number of factories in operation.
The table above shows the various cost curves of a particular firm at various levels of output. You can see at any level that Fixed Cost + Variable Cost = Total Cost. For example, at output level 6, the fixed costs are $200 and the variable costs are $45 which results in a total cost of $245. The table also shows how average fixed cost + average variable cost = average total cost. At output level 8, the AFC is $25 and the AVC is $9.75, and their sum gives you the ATC of $34.75. The final column in the table is the marginal cost (MC). Marginal cost is the change in total cost divided by the change in output, so going from an output of 2 to 3, the total cost changes from $220 to $224, and the change in output is 1 unit. This leads to a marginal cost of $4.
The diagram above shows what the FC, VC, and TC look like when graphed. The distance between the TC line and the VC line represents fixed costs. Fixed costs are constant and don't change with the production levels, but variable costs change with the level of production. Total costs change as variable costs change due to changes in output.
The diagram above shows how we graph marginal cost (MC), average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC). MC always crosses both AVC and ATC at their lowest point. If fixed costs increase, then both the AFC and ATC would shift up and vice versa. If variable costs increase, then both AVC and ATC will shift upward and vice versa. The MC curve only shifts when variable costs change. It will shift upward for an increase in variable costs and downward for a decrease in variable costs.
This graph shows what happens when all the cost curves, except for AFC, shift upward due to changes in variable costs. The opposite would happen if there was a decrease in variable costs.
💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
1.1Basic Economic Concepts: Scarcity
1.2Resource Allocation and Economic Systems
1.3Production Possibilities Curve (PPC)
📈 Unit 2: Supply and Demand
2.4Price Elasticity of Supply
2.6Market Equilibrium and Consumer and Producer Surplus
2.7Market Disequilibrium and Changes in Equilibrium
2.8The Effects of Government Intervention in Markets
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.6Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
📊 Unit 4: Imperfect Competition
4.1Introduction to Imperfectly Competitive Markets
💰 Unit 5: Factor Markets
5.2Changes in Factor Demand and Factor Supply
5.3Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
🏛 Unit 6: Market Failure and Role of Government
6.1Socially Efficient and Inefficient Market Outcomes
6.3Public and Private Goods
6.4The Effects of Government Intervention in Different Market Structures
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