ECO2201_Slides_5.2_Short_run_costs.pdf

ECO2201_Slides_5.2_Short_run_costs.pdf - Sorakom(Baltic...

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Sorakom (Baltic) Ngamdecho Department of Business Economics ECO 2201 Microeconomics Lesson 5.2 Short-run Costs 1 Sorakom (Baltic) Ngamdecho Department of Business Economics Short-run Costs ECO 2201 Lesson 5.2 1. Fixed Costs vs. Variable Costs 2. Graphing Cost Curves 3. Per-unit Costs or Average Costs ì Relationship between AVC and MC, ATC and MC ì Relationship between MP and MC ì U-shaped MC, AVC and ATC ì Shifting of the Cost Curves Review & Exercise Road Map 1
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Sorakom (Baltic) Ngamdecho Department of Business Economics ECO 2201 Microeconomics Lesson 5.2 Short-run Costs 2 1. Fixed Costs vs. Variable Costs ì Fixed costs (FC) are those that are spent and cannot be changed in the period of time under consideration. ì In the long run, there are no fixed costs since all inputs (and therefore their costs) are variable. ì In the short run, a number of inputs and their costs will be fixed , regardless of the level of production. ì Variable costs (VC) are costs that change as output changes. ì VC is zero when there is no production. ì Example: Wages 2 ì Total costs (TC) are the sum of the variable and fixed costs. TC = FC + VC 3 1. Fixed Costs vs. Variable Costs
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Sorakom (Baltic) Ngamdecho Department of Business Economics ECO 2201 Microeconomics Lesson 5.2 Short-run Costs 3 Example 1: Cost ì Suppose you open a clothing shop at Mega Bangna. ì VC is the money you pay for your workers when you want to sell clothes. ì You pay nothing if you do not hire anyone. ì FC is the money you pay as space rental that you have signed a contract with Mega Bangna for 3 years. ì You still have to pay for this even if you do not sell any clothes. 4 2. Graphing Cost Curves 5 Quantity ( Q ) Cost ($) 0 TFC TC TVC Total Cost (TC) Variable Cost (VC) Fixed Cost (FC) TC and VC curves increase as Q increases TC and VC are parallel.
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