Short Term Costs. Remember: The Short Run Short Run: time during which the quantity of at least one factor of production is fixed (frozen) Long Run: time.

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Presentation transcript:

Short Term Costs

Remember: The Short Run Short Run: time during which the quantity of at least one factor of production is fixed (frozen) Long Run: time that is sufficient to plan for and change all factor quantities Typical short-run costs: labor, raw materials, energy Typical long-run costs: expensive capital, land

The Production Function Production function: relationship between factors and products Usually shown in Total Product Curve: plot one variable against total production Why does the curve rise steeply at first? Why does the curve taper off?

Key Production Terms Total Product Marginal Product: how much extra production results from one more unit of input (factor) Increasing marginal returns: early in the total product graph Decreasing marginal returns: middle section of total product graph Negative marginal returns: end portion of graph Average Product: total product divided by total input (factor)

Graphing Key Costs Total Fixed Costs curve Why would this curve be a straight horizontal line? Average Fixed cost: why would this curve slope gradually downward? Total Variable Costs curve Why does this curve increase sharply at the far right? Total Costs curve Why does this curve run parallel to the Total Variable Costs curve?

Graphing Marginal Cost Marginal cost: the total cost of producing one more item At first, high marginal cost because output is so small Then, increasing efficiency lowers marginal cost Finally, marginal cost increases as inefficiencies arise with higher production volume Fishhook shaped “J” curve

Putting It All Together Average Fixed Cost: decreases with production Average Variable Cost: Smiley face starts high, lowers, then increases Average Total Cost: Similar shape as AVC, but raised by adding AFC Marginal Cost: fishhook “J” curve Fishhook shaped “J” curve