Chapter 8: Short-Run Costs and Output Decisions

ECON 110 Exam 1

Fixed Cost

Any cost that does not depend on the firm’s level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.

Variable Cost

A cost that depends on the level of production chosen.

Total Cost

Total fixed costs plus total variable costs.

Total Fixed Costs (TFC) or Overhead

The total of all costs that do not change with output even if output is zero.

Average Fixed Cost

Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs.

Spreading Overhead

The process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises.

Total Variable Cost

The total of all costs that vary with output in the short run.

Total Variable Cost Curve

A graph that shows the relationship between total variable cost and the level of a firm’s output.

Marginal Cost

The increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.

Marginal costs ultimately increase with output in the short run.

What happens to the shape of the marginal cost curve in the short-run?

Average Variable Cost

Total variable cost divided by the number of units of output; a per-unit measure of variable costs.

When marginal cost is below average cost, average cost is declining.

What happens to average cost when marginal cost is below average cost?

When marginal cost is above average cost, average cost is increasing.

What happens to average cost when marginal cost is above average cost?

Rising marginal cost intersects average variable cost at the minimum point of AVC. Signifies the least efficient scale of production where each of the additional unit starts to cost more to produce than the previous one.

Where does rising marginal cost intersect average variable cost?

Average Total Cost

Total cost divided by the number of units of output; a per-unit measure of total costs.

Perfect Competition

An industry structure in which there are many firms, each small relative to the industry, producing identical products and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter the market, and old firms can exit.

Homogeneous Products

Undifferentiated products; products that are identical to, or indistinguishable from, one another.

Total Revenue

The total amount that a firm takes in from the sale of its product: the price per unit times the quantity of output the firm decides to produce (P x q).

Marginal Revenue

The additional revenue that a firm takes in when it increases output by one additional unit. In perfect competition, the marginal revenue is equal to the price.