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Economics 2

Lecture 16: Costs in the Short Run

costs in the short run

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Costs in the Short Run

Firms face two types of costs in the short-run:

1. fixed costs: those costs that do not change as output increases and are incurred even if no output is produced at all, e.g. interest, depreciation, fire insurance
2. variable costs: those costs that do increase as output increases

Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)

Average Total Cost (ATC) ATC = TC/Q Average Fixed Cost (AFC) AFC = TFC/Q Average Variable Cost (AVC) AVC = TVC/Q

Marginal Cost (MC) is the change in total cost when the firm increases output by one unit. It is calculated by dividing the change in total cost by the change in output. The MC curve intersects the AVC and ATC curves at the minimum point of each AC curve.

Here's an example of calculating costs:

 Q	TFC	TVC	 TC	 AFC	AVC    ATC	MC

 0     $12      $0      $12                
 3      12	 9	 21	$4.00  $3.00  $7.00   $3.00
 9	12	18	 30	 1.33   2.00   3.33    1.50
14	12	27	 39	 0.86   1.93   2.79    1.80
16	12	36	 48	 0.75   2.25   3.00    4.50

David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building voice: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31