Short Run Costs of Production

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Short Run Costs of Production A2 Microeconomics - Tutor2u

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Page 1: Short Run Costs of Production

Short Run Costs of ProductionA2 Microeconomics - Tutor2u

Page 2: Short Run Costs of Production

Total and Average CostOutput Total Fixed

Cost (£)Total Variable Cost (£)

Total Cost (£)

Average Total Cost (£)

Marginal Cost (£)

0 2000 0 2000

50 2000 500

100 2000 700

150 2000 850

200 2000 1000

250 2000 1250

300 2000 1900

350 2000 2550

400 2000 3600

Page 3: Short Run Costs of Production

Total and Average CostOutput Total Fixed

Cost (£)Total Variable Cost (£)

Total Cost (£)

Average Total Cost (£)

Marginal Cost (£)

0 2000 0 2000

50 2000 500 2500

100 2000 700 2700

150 2000 850 2850

200 2000 1000 3000

250 2000 1250 3250

300 2000 1900 3900

350 2000 2550 4550

400 2000 3600 5600

Page 4: Short Run Costs of Production

Total and Average CostOutput Total Fixed

Cost (£)Total Variable Cost (£)

Total Cost (£)

Average Total Cost (£)

Marginal Cost (£)

0 2000 0 2000

50 2000 500 2500 50

100 2000 700 2700 27

150 2000 850 2850 19

200 2000 1000 3000 15

250 2000 1250 3250 13

300 2000 1900 3900 13

350 2000 2550 4550 13

400 2000 3600 5600 14

Page 5: Short Run Costs of Production

Total and Average CostOutput Total Fixed

Cost (£)Total Variable Cost (£)

Total Cost (£)

Average Total Cost (£)

0 2000 0 2000

50 2000 500 2500 50

100 2000 700 2700 27

150 2000 850 2850 19

200 2000 1000 3000 15

250 2000 1250 3250 13

300 2000 1900 3900 13

350 2000 2550 4550 13

400 2000 3600 5600 14

Look at what is happening to average cost

Page 6: Short Run Costs of Production

Total and Average CostOutput Total Cost

(£)Average Total Cost (£)

Marginal Cost (£)

0 2000

50 2500 50 10

100 2700 27 4

150 2850 19 3

200 3000 15 3

250 3250 13 5

300 3900 13 13

350 4550 13 13

400 5600 14 21

MARGINAL COSTThe cost of producing one more unit

Δ TCΔ Q

Page 7: Short Run Costs of Production

Total and Average CostOutput Total Cost

(£)Average Total Cost (£)

Marginal Cost (£)

0 2000

50 2500 50 10

100 2700 27 4

150 2850 19 3

200 3000 15 3

250 3250 13 5

300 3900 13 13

350 4550 13 13

400 5600 14 21

MC < AC; AC falling

MC < AC; AC falling

MC < AC; AC falling

MC < AC; AC falling

MC < AC; AC falling

MC = AC; AC constant

MC = AC; AC constant

MC > AC; AC rising

Page 8: Short Run Costs of Production

Average Cost, and Marginal Cost in the Short Run

MCCost

Output

AC

MC < AC; AC falling

MC = AC; AC constant

MC > AC; AC rising

Page 9: Short Run Costs of Production

Output Total Fixed Cost (£)

Total Variable Cost (£)

Total Cost (£)

Average Total Cost

(£)

Marginal Cost (£)

0 1000 0

50 1000 400 8

100 1000 800 8

150 1000 1200 8

200 1000 1600 8

250 1000 2000 8

300 1000 2400 8

350 1000 2800 8

400 1000 3200 8

Average Cost in SR when Marginal Cost is Constant

Page 10: Short Run Costs of Production

Output Total Fixed Cost (£)

Total Variable Cost (£)

Total Cost (£)

Average Total Cost

(£)

Marginal Cost (£)

0 1000 0 1000

50 1000 400 1400 8

100 1000 800 1800 8

150 1000 1200 2200 8

200 1000 1600 2600 8

250 1000 2000 3000 8

300 1000 2400 3400 8

350 1000 2800 3800 8

400 1000 3200 4200 8

Average Cost in SR when Marginal Cost is Constant

Page 11: Short Run Costs of Production

Output Total Fixed Cost (£)

Total Variable Cost (£)

Total Cost (£)

Average Total Cost

(£)

Marginal Cost (£)∆TC/∆Q

0 1000 0 1000

50 1000 400 1400 28 8

100 1000 800 1800 18 8

150 1000 1200 2200 14.70 8

200 1000 1600 2600 13 8

250 1000 2000 3000 12 8

300 1000 2400 3400 11.33 8

350 1000 2800 3800 10.85 8

400 1000 3200 4200 10.50 8

Average Cost when Marginal Cost is Constant

Page 12: Short Run Costs of Production

Output Average Total Cost

(£)

Marginal Cost (£)

0

50 28 8

100 18 8

150 14.70 8

200 13 8

250 12 8

300 11.33 8

350 10.85 8

400 10.50 8

Average Cost when Marginal Cost is Constant

Page 13: Short Run Costs of Production

Output Average Total Cost

(£)

Marginal Cost (£)

0

50 28 8

100 18 8

150 14.70 8

200 13 8

250 12 8

300 11.33 8

350 10.85 8

400 10.50 8

Average Cost when Marginal Cost is Constant

Output (Q)

Cost

£8

MC

If MC is constant at £8 per extra unit, then AC will decline towards MC as output expands

AC

Page 14: Short Run Costs of Production

Average Cost, and Marginal Cost in the Short Run

MCCost

Output

AC

AC will fall when

MC < AC

Page 15: Short Run Costs of Production

Average Cost, and Marginal Cost in the Short Run

MCCost

Output

AC

AC will fall when

MC < AC

Average cost is at a minimum when it is intersected by the

MC curve

Page 16: Short Run Costs of Production

Average Cost, and Marginal Cost in the Short Run

MCCost

Output

AC

AC will fall when

MC < AC

Average cost is at a minimum when it is intersected by the

MC curve

AC will rise when

MC > AC

Page 17: Short Run Costs of Production

Average Cost, and Marginal Cost in the Short Run

MCCost

Output

AC

AVC

MC also cuts AVC curve at min of AVC

6

Page 18: Short Run Costs of Production

Average Cost, and Marginal Cost in the Short Run

MCCost

Output

AC

AVCAFC

Page 19: Short Run Costs of Production

Average Cost, and Marginal Cost in the Short Run

MCCost

Output

AC

AVCAFC

AFC will fall as the level of

output expands

Page 20: Short Run Costs of Production

Average Cost, and Marginal Cost in the Short Run

MCCost

Output

AC

AVCAFCAFC

AFC will fall as the level of

output expands

Output

Cost

AFC

Page 21: Short Run Costs of Production

The “Family” of Short Run Cost Curves

MCCost

Output

AC

AVC

Page 22: Short Run Costs of Production

What happens if fixed costs rise?

MCCost

Output

AC

AVC

Page 23: Short Run Costs of Production

Rise in fixed cost – no change in marginal cost!

MCCost

Output

AC

AVC

6

Page 24: Short Run Costs of Production

Rise in fixed cost – so only an upward shift in AC

MCCost

Output

AC

AVC

AC2

Page 25: Short Run Costs of Production

A rise in variable costs of production

MCCost

Output

AC

AVC

Page 26: Short Run Costs of Production

A rise in variable costs of production

MC1Cost

Output

AC1

MC2

Page 27: Short Run Costs of Production

A rise in variable costs of production

MC1Cost

Output

AC1

MC2

AC2

Page 28: Short Run Costs of Production

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