Econ 281 Chapter8b

Econ 281 Chapter8b - Short-Run Cost Curves In the short run...

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1 Short-Run Cost Curves In the short run, at least 1 input is fixed (ie: (K=K*) Total fixed costs (TFC) are the costs associated with this fixed input (ie: rk) Total variable costs (TVC) are the costs associated with variable inputs (ie:wL) Short-run total costs are fixed costs plus variable costs: STC=TFC+TVC

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2 Q (units/yr) TC (\$/yr) TVC(Q, K*) TFC rK* STC(Q, K*) rK* Short Run Total Cost, Total Variable  Cost and Total Fixed Cost
3 Short Run Costs Example: Minimize the cost to build 80 units if Q=2(KL) 1/2 and K=25. If r=10 and w=20, classify costs. Q=2(KL) 1/2 80=2(25L) 1/2 80=10(L) 1/2 8=(L) 1/2 16=L (This was calculated previously)

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4 Short Run Costs Example: K*=25, L=16. If r=10 and w=20, classify costs. TFC=rK=10(25)=250 TVC=wL=20(16)=320 STC=TFC+TVC=770
5 The firm can minimize costs better in  the long run because it is “less  constrained”. Hence, the short run total cost curve  lies above the long run total cost curve  almost everywhere.

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6 L K TC 0 /w TC 1 /w TC 2 /w TC 2 /r TC 1 /r TC 0 /r Q 0 Long Run Expansion path 0 A C B Q 1 Q 0 K * Only at point A is short run  minimized as well as long run
7 Q (units/yr) TC (\$/yr) LRTC(Q) A STC(Q) rK *

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8 Definition:   The short run average cost function is  the short run total cost function divided by output,  Q. That is, the SAC function tells us the firm’s cost  per unit of output… Q Q STC Q SAC ) ( ) ( =
9 Definition:   The short run marginal cost function  is rate at which short run total cost changes with

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