1
Costs in the Short Run
•
Fixed cost (FC): the sum of all payments made to the
firm’s fixed factors of production.
•
Variable cost (VC): the sum of all payments made to the
firm’s variable factors of production.
•
Total cost (TC=FC+VC): the sum of all payments made
to the firm’s fixed and variable factors of production.
•
Marginal cost (MC): increase in total cost associated with
a one-unit increase in output.
Average Costs in the Short Run
•
Average fixed cost (AFC=FC/Q): fixed cost divided by
total output.
–
Always decreases as output goes up.
–
Spreading out total fixed cost over a larger output
•
Average variable cost (AVC=VC/Q): variable cost
divided by total output.
–
Initially decreasing and eventually increasing as output goes up.
–
Because of specialization and then eventually diminishing
returns
•
Average total cost (ATC=TC/Q): total cost divided by
total output.

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2
Cost Curves
– Costs on y-axis
– Output on x-axis
Where
AVC
is rising,
MC
is above
AVC
.
At the minimum
AVC
,
MC
equals
AVC
.
Where
AVC
is falling,
MC
is below
AVC
.
ATC
curve is U-shaped.
Short-Run Cost
Similarly, where
ATC
is falling,
MC
is below
ATC
.
Where
ATC
is rising,
MC
is above
ATC
.
At the minimum
ATC
,
MC
equals
ATC
.