Understanding Short Run Costs Short run costs Fixed Costs Variable Costs AC, MC and AVC

Fixed Costs In the short run, because at least one factor of production is fixed, output can be increased only by adding more variable factors Hence we make a distinction between fixed and variable costs

Fixed factor inputs

Fixed Costs Fixed costs These do not vary directly with the level of output i.e. they are treated as independent of production Examples of fixed costs include the rental costs of buildings, the costs of leasing or purchasing capital equipment such as plant and machinery, the costs of full-time contracted salaried staff, the costs of meeting interest payments on loans, the depreciation of fixed capital (due solely to age) and also the costs of business insurance

Examples of fixed costs for this business? (Speedferries)

Fixed Cost Curves Costs Output Total Fixed Cost

Fixed Cost Curves Costs Output Total Fixed Cost Average Fixed Cost

Variable Costs Variable costs are business costs that vary directly with output Examples of variable costs include the costs of intermediate raw materials and other components, the wages of part-time staff or employees paid by the hour, the costs of electricity and gas and the depreciation of capital inputs due to wear and tear. Total variable cost rises as output increases Average variable cost (AVC) = total variable costs (TVC) /output (Q)

Marginal Cost (MC) Marginal cost is the change in total costs from increasing output by one extra unit. The marginal cost of an extra unit of output is linked with the marginal productivity of labour If marginal product is falling, assuming the cost of employing extra units of labour is constant the extra costs of these units of output will rise There is an inverse relationship between marginal product and marginal cost.

The Marginal Cost Curve Costs Output Marginal Cost (MC)

An increase in marginal costs Costs Output MC1 MC2

Variable Cost Curves Costs Output Average Variable Cost Marginal Cost

An Increase in Variable Costs Costs Output Average Variable Cost MC1 MC2 AVC2

Family of short run cost curves Costs Output AVC MC ATC

A change (fall) in fixed costs Costs Output AVC MC ATC1 ATC2