Lecture+14+October+25

# Lecture+14+October+25 - Todays Agenda Short-run cost...

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Today’s Agenda Short-run cost functions in review Cost in the long run Supply in the short run

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Profits π () QT R Q STC Q =−
Profits π () QT R Q STC Q =− STC = p K K 0 + p L L* Total fixed cost Total variable cost

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Invert TP L to get L*(Q) Q L TP L Q L L*(Q)
Multiply labor requirements L*(Q) by the price of labor p L to find Total Variable Cost TVC Q L L*(Q) Q \$ p L L*(Q)

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Q L L*(Q) Q \$ TVC(Q) = p L L*(Q) Multiply labor requirements L*(Q) by the price of labor p L to find Total Variable Cost TVC
STC(Q) = TVC(Q) + TFC(Q) Q \$ TVC(Q) p K K 0 = TFC(Q) STC(Q)

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Short run average total cost: Average variable cost: Average fixed cost: Average cost SATC(Q) = STC(Q) Q AVC(Q) = TVC(Q) Q AFC(Q) = TFC(Q) Q
Q \$ STC(Q) Q' SATC equals the slope of ray from the origin to the STC Q \$/Q SATC(Q) Q'

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Average variable cost Q \$ TVC(Q) Q \$/Q SATC(Q) Q' AVC(Q) Q"
Average fixed cost STC = TVC + TFC STC TVC + TFC Q = Q Q AFC = SATC - AVC

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Average fixed cost Q \$/Q SATC(Q) AVC(Q)
Marginal cost Change in STC associated with changing Q by one unit Slope of tangent to STC

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Marginal cost SMC STC Q SMC TVC Q TFC Q SMC MVC MFC = =+ Δ Δ Δ Δ Δ Δ
Marginal cost SMC STC Q SMC TVC Q TFC Q SMC MVC MFC = =+ Δ Δ Δ Δ Δ Δ

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Marginal cost SMC STC Q SMC TVC Q TFC Q SMC MVC MFC = =+ Δ Δ Δ Δ Δ Δ
SMC STC Q SMC TVC Q TFC Q SMC MVC MFC = =+ Δ Δ Δ Δ Δ Δ Marginal cost 0

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SMC = slope of tangent to STC, TVC Q \$ TVC(Q) TFC(Q) STC(Q)
Q \$/Q SATC(Q) AVC(Q) SMC(Q) Use the average-and-marginal relationships to position the cost functions properly.

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Diminishing returns to labor Rising SMC Q L TP L
Diminishing returns to labor Rising SMC Q L TP L

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Diminishing returns to labor Rising SMC Q L TP L
Diminishing returns to labor Rising SMC Q \$/Q SATC(Q) AVC(Q) SMC(Q) Q L TP L

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Cost functions: algebraic example, cont.
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Lecture+14+October+25 - Todays Agenda Short-run cost...

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