Econs hl to tf1 short run costs
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Transcript of Econs hl to tf1 short run costs
6.3 COST OF PRODUCTION IN THE SHORT RUN (SHORT RUN COSTS)MUHAMMAD FAHMI AHMAD LATHPI
LEARNING OUTCOMES
0Explain the distinction between the short run & the long run, with reference to fixed costs and variable costs.
0Distinguish between total costs, marginal costs (MC) and average costs (AC)
0Draw diagrams illustrating the relationship between MC & AC, and explain the connection with production in the short run
THE DISTINCTION BETWEEN THE SHORT RUN AND THE LONG RUN0The distinction between short run and long run had
lead us to a distinction between fixed and variable costs
0Fixed costs: costs arise from the use of fixed inputs0Fixed costs do not change as output changes0Even if zero output, payments still have to be made
by the firm in the short run0Arise only in the short run
EXAMPLE OF FIXED COSTS
0Rental payments0Property taxes0Insurance premiums0Interest loans
VARIABLE COSTS0 Variable costs arise from the use of
variable inputs0 The costs vary as output increases or decreases
0 The more variable inputs a firm use, the greater the variable costs
0 Example: WAGE COSTS OF LABOUR0 Firm hires more labour to increases output,
therefore has increased wage costs0TOTAL COSTS: FIXED + VARIABLE COSTS
AVERAGE COSTS0Average costs are costs per unit of output, or total costs (TC)
divided by the number of units of output 0There are 3 total costs, each corresponding to an average
costs:Total CostsAverage Costs
Total fixed costs (TFC) Average fixed costs (AFC)Total variable costs (TVC) Average variable costs (AVC)Total costs (TC) Average costs (AC)
CALCULATE AVERAGE COSTS0Simply divide each of the totals by the unit of output (Q)
that the firm produces:
AVC = ATC =
Note that TC = TFC + TVC
So, ATC = AFC +AVC
MARGINAL COSTS0Marginal costs is the additional cost of producing one
more unit of output. It tells us how much total costs (TC) increase if there is an increase in output (Q) by one unit.
MC = =
(1)TP/Q
(2)Labour
(3)TFC ($)
(4)TVC ($)
(5)TC ($)
(6)AFC ($)
(7)AVC ($)
(8)ATC ($)
(9)MC ($)
0 0 200 0 200 - - - -
2 1 200 100
5 2 200 200
9 3 200 300
14 4 200 400
18 5 200 500
21 6 200 600
23 7 200 700
24 8 200 800
COSTS CURVES & PRODUCT CURVES
0Define a) fixed costs, b) variable costs and c) total costs
0Which is fixed and which are variable???
0Insurance premiums on the value of the property owned by a business
0Interest payments on a loan taken out by a business
0Wage payments to the workers that are hired by a firm
0Payments of the purchase of seeds and fertiliser by a business