141_Chapter_8_Lecture_Outline

141_Chapter_8_Lecture_Outline - 8 Short-Run Costs and...

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8 Short-Run Costs and Output Decisions OUTLINE OF TEXT MATERIAL I. Introduction A. This chapter focuses on production costs. 1. To calculate costs a firm must know the quantities and prices of inputs it  needs to produce its output. 2. For simplicity some of this analysis assumes input prices are constant. This  means input markets are assumed to be perfectly competitive. II. Costs in the Short Run A. Short-Run Cost 1. Total cost is the sum of total fixed cost and total variable cost: TC = TFC + TVC 2. fixed cost  is any cost that does not depend on the firm’s level of output.  a. These costs must be incurred even if the firm is producing nothing. b. There are no fixed costs in the long run. B. Fixed Costs 1. Total Fixed Cost  ( TFC ) or  overhead  is the sum of all the individual fixed  costs. 2. Average Fixed Cost  ( AFC ) is TFC divided by the number of units of output.  As output rises  AFC  falls (spreading overhead over a larger number of  units). 83
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84   Principles of Microeconomics 3. Firms have no control over fixed costs in the short run. Therefore fixed  costs are also sunk costs in the short run. 4. sunk cost  is any cost that does not change when a decision is made. C.
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141_Chapter_8_Lecture_Outline - 8 Short-Run Costs and...

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