1. Unit 3: Costs of Production and Perfect Competition
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2. Short-Run Production Costs
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3. 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
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4. 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
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5. 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
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6. 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
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7. 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?
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8. 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
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9. Calculating Costs AVC AFC ATC - $20 $5 $10 $12 $2 $14 Copyright
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10. ATC and AVC get closer and closer but NEVER touchMC
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
Quantity
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11. Calculate TC, VC, and FC of the 5th UnitMC
Costs
ATC
$20
$18
$16
$14
$12
$10 $8 $6 $4 $2
AVC
Calculate TC, VC, and FC of the 5th Unit
AFC
Quantity
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12. Total Cost Curves TC FC + VC = TC VC $10 FC Fixed Cost Costs Quantity
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13. 2008 Audit Exam
50.
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14. 1. 2.

16. 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
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17. How much does the 10th unit costs?MC
$30 25 20 15 10 5
ATC
AVC
Calculate TC, VC, and FC
AFC
Quantity
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18. Per-Unit Costs (Average and Marginal)
At output Q, what area represents: TC VC FC
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19. 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
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20. Calculating TC, VC, FC, ATC, AFC, and MCTP VC FC TC MC
AVC
AFC
ATC
100 1 10 2 16 3 21 4 26 5 30 6 36 7 46
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21. 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
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