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8/6/2019 12712 Costs-short Run
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Short-run costs slide 1
COSTS OF PRODUCTIONCOSTS OF PRODUCTIONGeneral principle: If you know the technology
of production (the production function or total
product curve), and if you know the prices of
the inputs to production, then you can find the
firms costs at any level of output.
Put another way:Put another way:Costs are determined by the technology of
production and input prices.
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Short-run costs slide 2
TOTAL
LABOR PRODUC0 01 32 15
3 364 485 566 627 668 68
Suppose labor costs $48 per day.
If labor is the only variable
input, we can find the total
variable costs at each output
level.
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Short-run costs slide 3
TOTAL PLL =
LABOR PRODUCT TVC
0 0 01 3 482 15 96
3 36 1444 48 1925 566 62
7 668 68 384
240288
336
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Short-run costs slide 4
0
100
200
300400
500
600
700
0 20 40 60 80
When output is 56,total variable costs
are $240.
When output is 56,total variable costs
are $240.
$
Q
TVC
HERES THE TVC CURVE.
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Short-run costs slide 5
If there are fixed costs (costs associated with inputs
that cant be changed), then we can add these to
the total variable costs to get total costs.
Total Cost = Fixed Cost + Total Variable Cost
TC = FC + TVC
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Short-run costs slide 6
100
200
300
400
500
600
700
0 20 40 60 80
TVC
TC
The total cost curve shows the total cost of
producing each output.
$
Q
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Short-run costs slide 7
Q TC
0 50.01 63.0
2 71.03 76.0
4 82.45 97.06 130.0
7 174.0
8 233.09 314.0
10 460.0
11 656.0
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Short-run costs slide 8
0
100
200
300
400
500
600
700
0 2 4 6 8 10 12 14
TCTC($)
Heres the graph of this new total cost curve.
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Short-run costs slide 9
AVERAGE
COSTAVE
RAGE
COSTAverage cost: Cost per unit of output. Total cost
divided by output. TC/Q.
Average cost curve: The curve that shows average
cost as a function of output.
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Short-run costs slide 10
AC = TC/Q= 97/5
And we can
graph theAC curve.
Q TC AC
0 50.01 63.0 63.0
2 71.0 35.5
3 76.0 25.3
4 82.4 20.6
5 97.0 19.4
6 130.0 21.7
7 174.0 24.9
8 233.0 29.1
9 314.0 34.9
10 460.0 46.0
11 656.0 59.6
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Short-run costs slide 11
0
20
40
60
80
100
120
0 2 4 6 8 10 12 14
AC
AC($/Q)
Q
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Short-run costs slide 12
AVERAGEVARIABLECOSTS CAN BE
SHOWN AT THE SAME TIME.
Q T C A C A C
0 5 0 .0
1 6 3 .0 6 3 .0 1 3 .0
2 7 1 .0 3 5 .5 1 0 .5
3 7 6 .0 2 5 .3 8 .7
4 8 2 .4 2 0 .6 8 .15 9 7 .0 1 9 .4 9 .4
6 1 3 0 .0 2 1 .7 1 3 .3
7 1 7 4 .0 2 4 .9 1 7 .7
8 2 3 3 .0 2 9 .1 2 2 .9
9 3 1 4 .0 3 4 .9 2 9 .3
1 0 4 6 0 .0 4 6 .0 4 1 .0
1 1 6 5 6 .0 5 9 .6 5 5 .1
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Short-run costs slide 14
MARGIN
ALCOST
Marginal cost: The change in total cost per unit
change in output. The increase in cost due to
producing one more unit of output. The slope ofthe total cost curve. (TC / (Q.
Marginal cost curve: The curve that shows marginal
cost as a function of output.
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Short-run costs slide 15
The marginal costof the 4th unit of
output is 6.4=(82.4-76)/(4-3)
And we can graphthe MC curve.
Q TC AC MC
0 50.01 63.0 63.0 132 71.0 35.5 83 76.0 25.3 5
4 82.4 20.6 6.45 97.0 19.4 14.66 130.0 21.7 33
7 174.0 24.9 44
8 233.0 29.1 599 314.0 34.9 8110 460.0 46.0 14611 656.0 59.6 196
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Short-run costs slide 16
0
20
40
60
80
100
120
0 2 4 6 8 10 12 14
AC, MCMC
AC
Q
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Short-run costs slide 17
Of course, the marginal and average cost curves must
conform to the usual rules about marginal and average
curves.
1) When the average is rising, the marginal quantity
must be greater than the average quantity.
2) When the average is falling, the marginal quantity
must be less than the average quantity.
3) When the average is neither rising nor falling (at a
maximum or minimum), average and marginal are
equal.
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Short-run costs slide 18
0
20
40
60
80
100
120
0 2 4 6 8 10 12 14
$/Q
MC
ACAVC
Q
WHAT WOULD THE AVERAGEVARIABLECOST CURVELOOK LIKE
IF WE WERE TO PUT IT ON THE SAME DIAGRAM?
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Short-run costs slide 19
Two alternative ways
of showing informationabout the firms costs.
0
20
40
60
80
100
120
0 2 4 6 8 10 12 14
0
100
200
300
400
500
600
700
0 2 4 6 8 10 12 14
$
$/Q
TC
Q
MC
AC
Q
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Short-Run Cost FunctionsAverage Total Cost = ATC = TC/Q
Average Fixed Cost = AFC = TFC/QAverage Variable Cost = AVC = TVC/Q
ATC = AFC + AVC
Marginal Cost = (TC/(Q = (TVC/(Q
Short-run costs slide 20
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Short-run costs slide 21
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Short-run costs slide 22
COST CURVESUMMARY:COST CURVESUMMARY:
Costs depend output, technology, and input prices.
There are two ways to depict a firms costs:
1) Total cost curves
2) Average and marginal cost curves
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Short-run costs slide 24
What are the effects on a firms costs of anincrease in the price of an input?
The increase in the price of a variable inputwill raise the total variable costs ofproduction at each output level.
This has the effect of raising both marginaland average costs.
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Short-run costs slide 25
0
50
100
150
200
250
300
350
0 2 4 6 8 10 12 14
0
10
20
30
40
50
60
0 2 4 6 8 10 12 14
$
$/Q
TC
TC
AC
AC
MC
MC
Q
Increasing the price of aninput raises both averageand marginal costs.
Q
TC is the total costcurve when the priceof a variable input isincreased.
AC and MC show theeffect of higher inputprices.
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Short-run costs slide 26
An improvement in technology lowers the cost of
producing each level of output.
Marginal and average costs of production will be
lower as a result.
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Short-run costs slide 27
0
50
100
150
200
250
300
350
0 2 4 6 8 10 12 14
0
10
20
30
40
50
60
0 2 4 6 8 10 12 14
$
$/Q
Q
Q
TC
TC
MC
MC
ACAC
IMPROVEMENTS IN
TECHNOLOGY REDUCECOSTS OF PRODUCTION.
Costs fall because thesame output can beproduced using fewerinputs.
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Short-run costs slide 28
CHECK UP: WHAT DO THE AC AND MCCURVES LOOK LIKE FOR THE FOLLOWINGTOTAL COST CURVES?
$
TC
Q
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Short-run costs slide 29
$/Q
AC
MC
Q
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Short-run costs slide 30
$
TC
Q
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Short-run costs slide 31
$/Q
AC=MC
Q
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