Aim: What are short-run production costs? Do Now: What are explicit costs? Implicit costs?

Short-run Short-Run Production Costs The Law of Diminishing Returns states that at the beginning of production, you get increasing returns per input, where as successive units of a variable resource are added to a fixed resource, you will get smaller and smaller increases of output. total product is the total output at various levels of labor input marginal product - change in output associated with each additional input of labor average product - output per worker (also "labor productivity")

Short-run Total product curve

Short-run Average and Marginal Product Curves

Short-run When marginal product > average product average product is rising When marginal product < average product average product is declining When marginal product = average product average product is at its maximum

Short-run Fixed, Variable, and Total Costs Fixed costs - costs which in total do not vary with changes in output Interest on debt Rental payments Insurance premiums Salaries to top management Depreciation on equipment

Short-run Variable costs - costs which change with the level of output Materials Fuel Power Transportation services

Short-run Total Cost as the sum of the Fixed & Variable Cost

Short-run as production begins, variable costs increase by a decreasing amount as production is greater, variable costs increase by an increasing amount Why? near the beginning of production, increasing returns for each input near the end, diminishing returns for each input - therefore, more input is needed to get same output

Short-run Key Points: total cost = fixed cost + variable cost variable costs can be changed in the short run fixed costs cannot be changed in the short run

Short-run Average Cost Curves

Short-run Average Fixed Cost (AFC) AFC = TFC / Q = total fixed cost / output Continuously declining because fixed cost is fixed at each output Average Variable Cost (AVC) AVC = TVC / Q = total variable cost / output Declines initially, reaches a minimum, and increases again (U-shaped). Initially, you have diminishing returns, and you need more VC per output. NOTE: Average Product and Average Variable Cost are mirror images. When average product is high, AVC is low When average product is low, AVC is high When average product is at a max, AVC is at a min

Short-run Average Total Cost (ATC) ATC = TC / Q = AFC + AVC Marginal Cost MC = Change in TC / Change in Q Diminishing returns causes increasing marginal cost. NOTE: Marginal Product and Marginal Cost are mirror images MC intersects ATC and AVC at their minimums Determinants of the Cost Curves 1. Changes in resource prices or quality 2. Greater technology 3. More productivity