Transcript Chapter 8

Short-Run Costs and Output
Decisions
Chapter 8
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Costs in the Short Run
A fixed cost is any cost that a firm bears in the
short run that does not depend on its level of
output. These costs are incurred even if the firm
is producing nothing. There are no fixed costs in
the long run.
A variable cost is any cost that a firm bears that
depends on the level of production chosen.
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Total Costs (TC)
Total Costs =
Total
+
Total
Fixed Costs Variable Costs
TC = TFC + TVC
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Average Fixed Costs
Average fixed cost (AFC) is the total fixed costs
divided by the number of units of output; a per
unit measure of fixed costs.
AFC =
Total Fixed Costs
quantity of output
Spreading overhead is the process of dividing
total fixed costs by more units of output.
Average fixed costs decline as output rises.
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Short Run Fixed Cost (Total and
Average) of a Hypothetical Firm (Figure 8.2)
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Total Variable Cost Curve
(Figure 8.3)
 The total variable cost curve
is a graph that shows the
relationship between total
variable cost and the level of
a firm’s output.
 It shows the cost of
production using the best
available technique at each
output level, given current
factor prices.
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Marginal Costs (MC)
Marginal cost is the increase in total cost that
results from producing one more unit of output.
Marginal costs reflect changes in variable costs.
In the short run, every firm is constrained by
some fixed input that leads to diminishing returns
to variable inputs and that limits its capacity to
produce. As the firm approaches capacity, it
becomes increasingly costly to produce more
output. Marginal costs ultimately increase with
output in the short run.
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Declining Marginal Product Implies That
Marginal Cost Will Eventually Rise With Output
(Figure 8.4)
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Marginal Cost and Total Variable Cost
Slope of TVC = ΔTVC = ΔTVC = ΔTVC = MC
Δq
1
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Total Variable Cost and Marginal Cost
for a Typical Firm (Figure 8.5)
 In the short run, every
firm is constrained by
some fixed factor of
production. Having a
fixed input implies
diminishing returns
(declining marginal
product) and a limited
capacity to produce. As
that limit is approached
marginal costs rise.
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Average Variable Costs
Average variable cost (AVC) is total variable cost
divided by the number of units of output.
AVC = TVC
q
Average variable cost always moves toward
marginal cost.
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Relationship Between Marginal Cost
and Average Variable Cost (Figure 8.6)
 Rising marginal cost
intersects average
variable cost at the
minimum point of
AVC.
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Total Costs
TC = TFC + TVC
Average total cost is the total cost divided by
the number of units of output.
ATC = TC
q
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Average Total Cost = Average Variable Cost
+ Average Fixed Cost (Figure 8.8)
 Marginal cost crosses
both AVC and ATC at
their minimum values.
 AVC and ATC get closer
together as output
increases since AFC falls
as output rises, but they
never cross.
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Total and Marginal Revenue
Total revenue is the total amount that a firm
takes in from the sale of its product: The price
per unit times the quantity of output the firm
decides to produce (P x q).
Marginal revenue is the additional revenue that
a firm takes in when it increases output by one
additional unit. In perfect competition, P = MR.
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Comparing Costs and Revenues to
Maximize Profit
As long as marginal revenue is greater than
marginal cost, added output means added
profit.
The profit maximizing perfectly competitive firm
will produce up to the point where the price of
its output is just equal to the short run marginal
cost; the level of output where: P* = MC or
MR = MC.
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The Profit-Maximizing Level of Output
for a Perfectly Competitive Firm (Figure 8.10)
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Marginal Cost Is the Supply Curve of
a Perfectly Competitive Firm (Figure 8.11)
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Review Terms & Concepts
 average fixed cost (AFC)
 average total cost (ATC)
 average variable cost
(AVC)
 fixed cost
 marginal cost (MC)
 marginal revenue (MR)
 spreading overhead
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 total cost (TC)
 total fixed cost (TFC)
 total revenue (TR)
 total variable cost (TVC)
 total variable cost curve
 variable cost
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