Chapter 8_Micro_S09

Chapter 8_Micro_S09 - Chapter 8 Short-Run Costs and Output...

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8 Chapter Short-Run Costs and Output Decisions
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Overview Costs in the Short Run (Definitions and Graphs) Total Fixed Costs (TFC), Average Fixed Costs (AFC) Total Variable Costs (TVC), Average Variable Costs (AVC) Total Costs (TC), Average Total Costs (ATC) Marginal Costs (MC) Output Decisions: Profit Maximization Total Revenue (TR) Marginal Revenue (MR) Comparing Costs and Revenues to Maximize Profit/ The profit maximizing level of output for all firms/ for perfectly competitive firms. The Short-Run Supply Curve
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COSTS IN THE SHORT RUN fixed cost (sunk costs) Any cost that does not depend on the firm’s level of output. These costs are incurred even if the firm is producing nothing. Examples: Employees that are under long-term contracts. . Rents of buildings that are under lease. Electricity that must be paid for buildings. All must be paid no matter how much is produced Firms have no control over fixed costs in the short run. For this reason, fixed costs are sometimes called sunk costs.
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COSTS IN THE SHORT RUN There are no fixed costs in the long run . Recall in the long run… 1. no fixed inputs 2. firms can enter/exit In the long run firms can exit the industry or expand/reduce capacity to change production levels. This implies that all costs are tied to the level of output in the long run.
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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. average fixed cost ( AFC ) Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs. Letting q represent output, q TFC AFC =
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COSTS IN THE SHORT RUN 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
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FIGURE 8.2 Short-Run Fixed Cost (Total and Average) of a Hypothetical Firm 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
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COSTS IN THE SHORT RUN variable cost A cost that depends on the level of production chosen. Example: Suppose Jane opens a lemonade stand. Variable costs would include expenditures on sugar, water, lemons, cups since the level of these expenditures depend on the level of lemonade produced. Fixed Costs would include the costs of the stand and signs.
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COSTS IN THE SHORT RUN total variable cost ( TVC ) The total of all costs that vary with output. Average Variable Cost ( AVC ) Total variable cost divided by the number of units of output. q TVC AVC =
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Total Cost ( TC ) The sum of Total Fixed costs and Total Variable Costs. Average Total Cost (
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This note was uploaded on 07/22/2009 for the course ECON 203 taught by Professor Nelson during the Fall '08 term at Texas A&M.

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Chapter 8_Micro_S09 - Chapter 8 Short-Run Costs and Output...

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