Chapter 8: Short-Run Costs and Output Decisions

Firm’s Decisions

Fixed Costs Average fixed cost is simply total fixed cost divided by the quantity of output. As output increases, average fixed cost declines because we are dividing a fixed number (e.g. $1,000) by a larger and larger quantity.

Variable Costs

Variable Costs (cont.)

Total Costs

Total Costs (cont.)

Review

Review (cont.)

Perfect Competition

Total Revenue (TR) and Marginal Revenue (MR) total revenue (TR) is 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 (P x q). marginal revenue (MR) is the additional revenue that a firm takes in when it increases output by one additional unit. In perfect competition, P = MR. Clearly, for a competitive firm, MR is simply equal to the current market price of each additional unit sold.

The Profit-Maximizing Level of Output