short and long run costs

different total costs

Total fixed cost (TFC)
Total variable cost (TVC)
Total cost (TC)

Total fixed cost (TFC)

= total cost of the fixed assets that a firm uses in a given time period

Example: rent for land/building, base utility bills, insurance, healthcare, etc.

Total variable cost (TVC)
definition + how to calculate

= total cost of variable assets a firm uses in a given period of time

TVC is equal to the number of variable factors times the cost of the variable factor

Example: labor, raw materials for production, etc.

Total cost (TC)

= total cost of all fixed and variable factors used to produce a certain output

Average/Marginal costs

Average fixed Cost (AFC)
Average Variable Cost (AVC)
Average Total Cost (ATC)
Marginal Cost (MC)

Average fixed cost (AFC)
definition + how to calculate

= fixed cost per unit of output

Calculated by dividing TFC by amount of output (q): AFC = TFC/q

Example: If TFC = $400, then producing 10 units results in an ATC of $40 ($400/10); if 25 units are produced, AFC = $16 ($400/25)

Average variable cost (AVC)
definition + how to calculate

= variable cost per unit of output

Calculated by dividing TVC by amount of output (q): AVC = TVC/q

Average total cost (ATC)
definition + how to calculate

= total cost per unit of output

ATC = AFC + AVC or TC divided by amount of output: ATC = TC/q

Marginal cost (MC)
definition + how to calculate

= increase in the total cost of producing an extra unit of output

MC = ΔTC divided by change in amount of output (q): MC = ΔTC/Δq

how can TP be increased?

Can only be increased by adding more units of variable factors (machine operators) to fixed factors

How to reverse law of diminishing returns

Can only be reversed by increasing the quantity of the fixed factor

The Law of Diminishing Marginal Returns (flowerpot law)

As more and units of a variable factor are added to a given quantity of a fixed factor, output will eventually diminish

Applies to both output and costs

What are the characteristics of TFC and why?

Because number of assets is fixed, TFC is a constant amount

TFC is the same whether the firm produces or not
- because it is a constant amount

what happens to TVC as the firm grows

TVC increases as the firm uses more of the variable factor

what happens to AFC as the firm grows and why

AFC always falls as output increases
- Because TFC is always constant
- mathematically (since TFC doesnt change but variable product used increases thus AFC gets smaller and smaller)

what happens to AVC as the firm grows and why

AVC falls as output increases, then starts to rise again as output continues to increase

This is explained by the law of diminishing marginal returns

what happens to ATC as the firm grows and why

Also tends to fall as output increases, and then starts to rise again as output continues to increase

what happens to MC as the firm grows and why

Again, MC falls as output increases, then starts to rise again as output continues to increase

More law of diminishing marginal returns!

Whats the relationship between the MC, ATC, and AVC curves

The MC always curve cuts the AVC and ATC curves at their lowest points

what happens when once MC = AC
(graphically + mathematically)

the increasing MC starts to increase average costs

what happens when once MC = AC
(producers)

Where the MC curve intersects the AC curve, producers are producing at the lowest possible cost

Therefore, productive efficiency is achieved where MC = AC

How do firms produce more long term

they must lower their costs by altering the factors of production

The long run average cost curve (LRAC) is also known as ... what and why?

an "envelope curve" because it envelops an infinite number of short run average cost (SRAC) curves

What does the LRAC represent

LRAC curve represents boundary between attainable and unattainable unit cost levels for a firm

Scale

a proportion or relative level of size or degree

what are the 3 types of returns to scale the LRAC shows

increasing, constant, or decreasing returns of scale

increasing returns to scale

increase in factors of production leads to greater increase in output and lower long run costs

Decreasing returns to scale

increase in factors of production leads to smaller increase in output and higher long run costs

Variable costs

Costs that change as output changes