Lecture_Microeconomics_Chapter8

# Lecture_Microeconomics_Chapter8 - Short-Run Costs and...

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8 Short-Run Costs and Output Decisions

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SHORT-RUN COSTS AND OUTPUT DECISIONS You have seen that firms in perfectly competitive  industries make three specific decisions. FIGURE 8.1 Decisions Facing Firms DECISIONS are based on INFORMATION The quantity of output to  supply 1.   The price of output 1. How to produce that  output (which technique  to use) 1. Techniques of production  available* The quantity of each  input to  demand 3.   The price of inputs* *Determines production costs
COSTS IN THE SHORT RUN 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 ( TC )   Fixed costs plus variable  costs.

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COSTS IN THE SHORT RUN total fixed costs ( TFC ) or overhead   The  total of all costs that do not change with  output, even if output is zero. Total Fixed Cost ( TFC ) FIXED COSTS TABLE 8.1   Short-Run Fixed Cost (Total and  Average) of a Hypothetical Firm (1) Q (2) TFC (3) AFC  ( TFC/Q ) 0 1 2 3 4 5 \$1,000 \$1,000 \$1,000 \$1,000 \$1,000 \$1,000 \$         - 1,000 500 333 250 200 Firms have no control over fixed costs in the short run. For this reason, fixed costs are sometimes called sunk costs.
COSTS IN THE SHORT RUN sunk costs   Another name for fixed costs  in the short run because firms have no  choice but to pay them. average fixed cost ( AFC Total fixed cost  divided by the number of units of output; a per-unit measure of fixed costs. Average Fixed Cost ( AFC ) q TFC AFC =

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COSTS IN THE SHORT RUN spreading overhead   The process of  dividing total fixed costs by more units of  output.  Average fixed cost declines as  quantity rises. FIGURE 8.2 Short-Run Fixed Cost (Total and Average) of a Hypothetical Firm
COSTS IN THE SHORT RUN total variable cost ( TVC The total of all  costs that vary with output in the short run. Total Variable Cost ( TVC ) VARIABLE COSTS total variable cost curve  A graph that  shows the relationship between total  variable cost and the level of a firm’s  output.

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COSTS IN THE SHORT RUN (9 x \$2) + (6 x \$1)     = \$24 (6 x \$2) + (14 x \$1)   = \$26 6 14 9 6 A B 3 Units of      output (7 x \$2) + (6 x \$1)     = \$20 (4 x \$2) + (10 x \$1)   = \$18
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Lecture_Microeconomics_Chapter8 - Short-Run Costs and...

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