Understanding Costs

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					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
    l   These do not vary directly with the level of
        output i.e. they are treated as independent of
        production
    l   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



                   Total Fixed Cost




                                  Output
   Fixed Cost Curves

Costs



                   Total Fixed Cost




                       Average Fixed Cost




                                   Output
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
    l   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
    l   There is an inverse relationship between
        marginal product and marginal cost.
   The Marginal Cost Curve

Costs                  Marginal
                      Cost (MC)




                              Output
   An increase in marginal costs
                       MC2
Costs
                         MC1




                               Output
   Variable Cost Curves

Costs
                    Marginal Cost
                                     Average
                                Variable Cost




                                    Output
   An Increase in Variable Costs
                       MC2

Costs                           AVC2

                       MC1
                                  Average
                             Variable Cost




                                Output
   Family of short run cost
   curves
Costs
                         MC        ATC



                                   AVC




                              Output
   A change (fall) in fixed costs

Costs
                         MC         ATC1

                                    ATC2

                                    AVC




                              Output

				
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posted:7/2/2013
language:English
pages:22