AP Microeconomics AMSCO Guided Notes
3.2: Short-Run Production Costs
AP Microeconomics Guided Notes
AMSCO 3.2 - Short-Run Production Costs
Essential Questions
- Why should firms consider short-run production costs?
I. Types of Short-Run Production Costs
1. What is the difference between fixed costs and variable costs in the short run?
A. Variable Costs and Fixed Costs
1. What are variable costs and how do they relate to the quantity of output produced?
2. What are fixed costs and why must firms pay them even at zero output?
B. Total Costs and Marginal Costs
1. How is total cost calculated and what does the equation TC = VC + FC represent?
2. What is marginal cost and how does it help firms decide whether to increase production?
C. Average Costs
1. What is average total cost and how is it calculated from total cost and output?
2. How do average variable cost and average fixed cost differ, and why is average fixed cost considered a sunk cost?
II. Short-Run Production Revenue
1. How is total revenue calculated and what does the equation P × Q = TR represent?
2. What is marginal revenue and how is it calculated using the change in total revenue and quantity?
III. Short-Run Production in Practice
A. Specialization
1. How can specialization help a business reduce marginal costs and improve efficiency?
B. Division of Labor
1. What is division of labor and how does it help reduce average costs and increase revenue?
C. Shutdown of Production
1. Under what circumstances would a firm rationally choose to shut down production in the short run?
2. Why would a firm's losses be smaller if it shuts down rather than continues producing at a loss?
Key Terms
short-run production cost
variable costs
total variable cost
fixed cost
total fixed costs
marginal cost
total cost
average total cost
average variable cost
average fixed cost
revenue
marginal revenue
total revenue
specialization
division of labor
shutdown of production
short-run cost curves