Production in the Short Run 1. In the short run n some inputs are fixed (e.g. capital) n other inputs are variable (e.g. labour) 2. Inputs are combined to make a business’s total product n average product is total product divided by the number of workers n marginal product is the extra total product from employing an additional worker

Relating Average and Marginal Values 3. Average and marginal values are related using three rules n if an average value rises then the marginal value must be above the average value n if an average value falls then the marginal value must be below the average value n if an average value stays constant then the marginal value must equal the average value

Total, Marginal, and Average Product In this example, the total product curve is hill-shaped, with its peak at 5 workers and its slope dependent on the behaviour of marginal product. The range of increasing returns, where marginal product rises, applies during the hiring of the first 2 workers. In the range of positive diminishing returns, during the hiring of the third, fourth, and fifth workers, marginal product falls and is positive. In the last range of negative diminishing returns, from the sixth worker onward, marginal product falls and is negative. The shape of the average product curve can be linked to marginal product, since average product reaches a maximum where it crosses the marginal product curve at 2 workers.

Costs in the Short Run 4. Short-run costs include n fixed costs (costs of all fixed inputs) n variable costs (costs of all variable inputs) n total cost (fixed costs + variable costs)

Marginal Cost 5. Marginal cost is the extra cost of producing an extra unit of output n it equals the change in total cost divided by the change in total product

Per-Unit Costs 6. Per-unit costs include n average fixed cost (fixed costs divided by total product) n average variable cost (variable costs divided by total product) n average cost s either total cost divided by total product s or average fixed cost + average variable cost

Summary of Short-Run Cost Curves When a business’s output of a certain product rises, the average fixed cost curve (AFC) falls. The average variable cost curve (AVC) declines until it reaches point “a”, where it meets the marginal cost curve (MC), after which the AVC curve rises. The average cost curve (AC) also falls, and then rises. It reaches a minimum at point “b” where it meets the MC curve.