Short-Run Costs and Output Decisions

Decisions Facing Firms 3. 2. 1. 3. 2. 1. *Determines production costs The price of inputs* Techniques of production available* The price of output INFORMATION The quantity of each input to demand How to produce that output (which technique to use) The quantity of output to supply are based on DECISIONS

Costs in the Short Run ,[object Object],[object Object],[object Object],[object Object]

Costs in the Short Run ,[object Object],[object Object],Total Cost = Total Fixed + Total Variable Cost Cost

Fixed Costs ,[object Object],[object Object]

Short-Run Fixed Cost (Total and Average) of a Hypothetical Firm ,[object Object],250 1,000 4 200 1,000 5 333 1,000 3 (2) TFC (3) AFC (TFC/q) 500 1,000 2 1,000 1,000 1 $  $1,000 0 (1) q

Variable Costs ,[object Object],[object Object]

Derivation of Total Variable Cost Schedule from Technology and Factor Prices ,[object Object],$10 $18 $24 (14 x $1) = (6 x $1) = (10 x $1) = (6 x $1) = (6 x $1) = (4 x $1) = (4 x $2) + 10 4 B output TOTAL VARIABLE COST ASSUMING P K = $2, P L = $1 TVC = ( K x P K ) + ( L x P L ) UNITS OF INPUT REQUIRED (PRODUCTION FUNCTION) USING TECHNIQUE PRODUCT (2 x $2) + 6 2 B output (6 x $2) + (9 x $2) + (7 x $2) + (4 x $2) + $26 $20 $12 14 6 6 4 L 6 B output K 9 A Units of 3 7 A Units of 2 Units of 4 A 1

Marginal Cost ,[object Object],[object Object]

Derivation of Marginal Cost from Total Variable Cost ,[object Object],6 24 3 TOTAL VARIABLE COSTS ($) MARGINAL COSTS ($) 8 18 2 10 10 1 0 0 0 UNITS OF OUTPUT

The Shape of the Marginal Cost Curve in the Short Run ,[object Object],[object Object],[object Object],[object Object]

The Shape of the Marginal Cost Curve in the Short Run ,[object Object]

Graphing Total Variable Costs and Marginal Costs ,[object Object],[object Object]

Average Variable Cost ,[object Object],[object Object],[object Object]

Relationship Between Average Variable Cost and Marginal Cost ,[object Object],[object Object],[object Object],[object Object]

Short-Run Costs of a Hypothetical Firm 18 2 9,000 1,000 16 20 8,000 500                         208.4 200 1,042 1,000 8.4 10 42 5 258 250 1,032 1,000 8 8 32 4 341 333 1,024 1,000 8 6 24 3 509 500 1,018 1,000 9 8 18 2 1,010 1,000 1,010 1,000 10 10 10 1  $  $ 1,000 $ 1,000 $  $  $ 0 $ 0 (8) ATC (TC/q or AFC + AVC) (7) AFC ( TFC / q ) (6) TC ( TVC + TFC ) (5) TFC (4) AVC ( TVC/q ) (3) MC (  TVC ) (2) TVC (1) q

Total Costs ,[object Object],[object Object]

Average Total Cost ,[object Object],[object Object]

Relationship Between Average Total Cost and Marginal Cost ,[object Object],[object Object],[object Object]

Output Decisions: Revenues, Costs, and Profit Maximization ,[object Object]

Total Revenue ( TR ) and Marginal Revenue ( MR ) ,[object Object],[object Object],[object Object]

Comparing Costs and Revenues to Maximize Profit ,[object Object],[object Object],[object Object]

Profit Analysis for a Simple Firm 0 90 90 15 30 80 10 6 15 60 75 15 20 50 10 5 20 40 60 15 10 30 10 4 15 30 45 15 5 20 10 3 5 25 30 15 5 15 10 2 -5 20 15 15 10 10 10 1 -10 $ 10 $ 0 $ 15 $  $ 0 $ 10 $ 0 (8) PROFIT ( TR  TC ) (7) TC ( TFC + TVC ) (6) TR ( P x q ) (5) P = MR (4) MC (3) TVC (2) TFC (1) q

The Short-Run Supply Curve ,[object Object]

Short-Run Costs and Output Decisions

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