Unit 3: Costs of Production and Perfect Competition Copyright ACDC Leadership 2015
Short-Run Production Costs Copyright ACDC Leadership 2015
Definition of the “Short-Run” We will look at both short-run and long-run production costs. Short-run is NOT a set specific amount of time. The short-run is a period in which at least one resource is fixed. Plant capacity/size is NOT changeable In the long-run ALL resources are variable NO fixed resources Plant capacity/size is changeable Today we will examine short-run costs 3 Copyright ACDC Leadership 2015
Different Economic Costs Total Costs FC = Total Fixed Costs VC = Total Variable Costs TC = Total Costs Per Unit Costs AFC = Average Fixed Costs AVC = Average Variable Costs ATC = Average Total Costs MC = Marginal Cost Copyright ACDC Leadership 2015
Definitions Fixed Costs: Variable Costs: Costs for fixed resources that DON’T change with the amount produced Ex: Rent, Insurance, Managers Salaries, etc. Average Fixed Costs = Fixed Costs Quantity Variable Costs: Costs for variable resources that DO change as more or less is produced Ex: Raw Materials, Labor, Electricity, etc. Average Variable Costs = Variable Costs Quantity Copyright ACDC Leadership 2015
Definitions Total Cost: Marginal Cost: Sum of Fixed and Variable Costs Average Total Cost = Total Costs Quantity Marginal Cost: Additional costs of an additional output. Ex: If the production of two more output increases total cost from $100 to $120, the MC is _____. $10 Marginal Cost = Change in Total Costs Change in Quantity Copyright ACDC Leadership 2015
Calculating Costs Notice that the AVC + AFC = ATC ATC of 6 Units Fill out the chart then calculate: ATC of 6 Units AFC of 2 Units AVC of 4 Units ATC of 1 Unit AVC of 5 Units AFC of 5 Units ATC of 5 Units Output Variable Cost Fixed Total Marginal $0 $10 - 1 2 $17 3 $25 4 $40 5 $60 6 $110 $20 $5 $10 $12 $2 $14 Notice that the AVC + AFC = ATC For 5 Units: AVC ($12) + AFC ($2) = ATC ($14) Is this is true for 4 Units? Copyright ACDC Leadership 2015
Calculating Costs AVC AFC ATC $0 $10 - 1 2 $17 3 $25 4 $40 5 $60 6 Output Variable Cost Fixed Total Marginal $0 $10 - 1 2 $17 3 $25 4 $40 5 $60 6 $110 AVC AFC ATC - $20 $5 $10 $12 $2 $14 Copyright ACDC Leadership 2015
Calculating Costs AVC AFC ATC - $20 $5 $10 $12 $2 $14 Copyright ACDC Leadership 2015
ATC and AVC get closer and closer but NEVER touch MC Costs ATC $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 AVC ATC and AVC get closer and closer but NEVER touch Average Fixed Cost AFC 1 2 3 4 5 6 Quantity Copyright ACDC Leadership 2015
Calculate TC, VC, and FC of the 5th Unit MC Costs ATC $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 AVC Calculate TC, VC, and FC of the 5th Unit AFC 1 2 3 4 5 6 Quantity Copyright ACDC Leadership 2015
Total Cost Curves TC FC + VC = TC VC $10 FC Fixed Cost Costs Quantity Copyright ACDC Leadership 2015
2008 Audit Exam 50. Copyright ACDC Leadership 2015
1. 2.
Calculating Costs Practice Fill out the chart then calculate: ATC of 6 Units AFC of 2 Units AVC of 3 Units ATC of 5 Units AVC of 2 Units AVC of 4 Units AFC of 4 Units ATC of 4 Units Output Variable Cost Fixed Total Marginal $0 $20 - 1 $12 2 $22 3 $27 4 $40 5 $60 6 $100 $20 $10 $9 $16 $11 $5 Copyright ACDC Leadership 2015
How much does the 10th unit costs? MC $30 25 20 15 10 5 ATC AVC Calculate TC, VC, and FC AFC 7 8 9 10 11 Quantity Copyright ACDC Leadership 2015
Per-Unit Costs (Average and Marginal) At output Q, what area represents: TC VC FC Copyright ACDC Leadership 2015
Additional Practice TP VC FC TC MC AVC AFC ATC 100 1 10 2 16 3 21 4 26 100 1 10 2 16 3 21 4 26 5 30 6 36 7 46 Copyright ACDC Leadership 2015
Calculating TC, VC, FC, ATC, AFC, and MC TP VC FC TC MC AVC AFC ATC 100 1 10 2 16 3 21 4 26 5 30 6 36 7 46 Copyright ACDC Leadership 2015
Calculate A-E TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16 116 6 8 A 100 - 1 10 110 2 16 116 6 8 A 58 3 21 121 5 B 33.3 40.3 4 26 126 6.5 25 31.5 30 130 D E 36 136 C 16.67 22.67 7 46 146 6.6 14.3 20.9 Copyright ACDC Leadership 2015