Microeconomics Ch. 8: Short-Run Costs and Output Decisions

1) What quantity and combination of inputs it needs to produce its product
2) How much those inputs cost

Any cost that does not depend on the firms' level of output. These costs are incurred even if the firm is producing nothing (output= 0). There are no fixed costs in the long run.

A cost that depends on the level of production chosen (level of output)

Total fixed costs plus total variable costs.
TC= TFC + TVC

The total of all costs that do not change with output even if output is zero.
(i.e., paying for heating so factory pipes don't burst in the winter)

Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs.
(Average fixed cost fall as output rises because the same total is being spread over, or divided by, a larger number of units)

The process of dividing total fixed costs by more units of output. Average cost declines as quantity rises. (Never approaches 0 though)

The total of all costs that vary with output in the short run.
(To produce more output, a firm uses more inputs. The cost of additional output depends directly on what additional inputs are required and how much they cost)
(Input requirements are determined by technology)

To find out which technology involves the least cost, a firm must compare the total variable costs of producing that level of output using different production techniques (firms' fixed costs don't come into the decision making process)

A graph that shows the relationship between total variable cost and the level of a firm's output (Q)
The slope of the TVC curve is positive (to make more output requires more inputs and therefore more costs)

1) The techniques of production that are available
2) The prices of the inputs required by each technology

TVC= (K Px) + (L Pl)
(K= Variable Capita - capital that can be changed in the short run -- i.e., a rented piece of equipment)
(Px= Price of Capital)
(L= Labor)
(Pl= Price of Labor)

The increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs (the added resources, or inputs, needed to produce 1 additional unit)
(i.e., Marginal Cost= Total Variable Cost of 1 output - Total Variable Cost of 0 outputs)

1) Leads to diminishing returns to variable inputs
2) Limits its capacity to produce. As a firm approaches that capacity, it becomes increasingly costly to produce successively higher levels of output.
Marginal Costs ultimately increase with output in the short-run

Change in TVC/ Change in Q = Change in TVC/ 1
(Change in TVC = MC)
Marginal cost actually is the slope of the total variable cost curve
(After q increases at an increasing rate, total variable cost is increasing at a decreasing rate)

Total Variable Cost divided by the number of units of outputs; a per-unit measure of variable costs
(AVC= TVC/ q) or
(ATC = AFC + AVC)
(Average Variable Cost follows Marginal Cost but lags behind)

An industry structure in which there are many firms, each small relative to the industry, producing identical products, and in which no firm is large enough to have any control over prices. In a perfectly competitive industries, new competitors can freely enter the market and old firms can exit.
Firms act as "price takers," because prices are set by the interaction of all firms in the industry.

Undifferentiated products; products that are identical to, or indistinguishable from, one another

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
(TR= P * q)

The additional revenue that a firm takes in when it increases output by one additional unit. In perfect competition, the marginal revenue is equal to the price (P*= d= MR)
The marginal revenue curve and the demand curve facing a competitive firm (horizontal line) are identical

Each possible incremental unit adds more to revenue that it does to cost.
Firms will produce as long as Marginal Revenue exceeds Marginal Cost.
(When MR> MC = increase Q)
(When MR<MC = decrease Q)
(When MR=MC = Profit is maximized)

-AFC= Fixed Cost (FC)/ Quantity (Q)
-AVC= Variable Cost (VC)/ Quantity (Q)
-ATC= Total Cost (TC)/ Quantity (Q)

The quantity that minimizes average total cost
(The marginal-cost curve crosses the average-total-cost curve at the efficient scale)