ECN 221 Chapter 7 In-Class Work: Short-Run Costs – This is not due for a grade
Definitions:
Total Fixed Costs (TFC) are also known as “overhead”. These are the costs associated with running a firm that do not
change with the level of output. Fixed costs are the costs associated with fixed inputs. Examples of fixed costs include rent
and management salaries.
Total Variable Costs (TVC) are costs that do change with the level of output. Variable costs are the costs associated with
variable inputs. Examples of variable costs are fuel, electricity, labor costs, and materials costs.
Total Cost (TC) is the sum of all costs, both fixed and variable. TC = TFC + TVC
Average Fixed Cost (AFC) is the fixed costs divided by the number of units of output. AFC = TFC / Q
Average Variable Cost (AVC) is variable costs divided by the number of units of output. AVC = TVC / Q
Average Total Cost (ATC) is also known as “unit cost”, and are found by dividing total costs by the number of units of
output. ATC = TC / Q = AFC + AVC
Marginal Cost (MC) is the extra cost associated with producing one more unit of output. Marginal cost is found as the
change in total cost for a given change in output. MC = ∆TC / ∆Q
Similar to the way we illustrated changes in various measures of production, we can also graphically represent how costs change with
output using cost curves.
Consider the following data representing the change in costs for various levels of production (note that the output per worker is the
same as when we looked at production). Assume that there are only two inputs: Labor (the variable input) and Capital (the fixed
input), and that variable costs change with output as listed in the table below. Also assume that monthly costs of capital are $200.00.
# of workers (L) Total Product (Q)
0
0
FC
VC
0
1
5
60
2
12
120
3
21
180
4
28
240
5
30
300
6
30
360
7
28
420
TC
AFC
AVC
ATC
∆TC
∆Q
→ Fill in the missing data for the short-run costs of this firm.
→ What is ∆Q equal to? What is ∆TC equal to? Hence how can we express MC?
→ Why shouldn’t we bother filling in the marginal cost for the units of output when labor is greater than 5?
MC
→ Use the top graph below to plot fixed cost, variable cost and total cost, and the lower graph to plot average fixed
cost, average variable cost and average total cost as well as marginal cost.
Costs ($)
500
400
300
200
100
0
5
10
15
20
25
30
units of output (Q)
5
10
15
20
25
30
units of output (Q)
Costs ($)
50
40
30
20
10
0
→ Describe the changes in average variable cost and marginal cost as output is expanded. To what can you attribute
these patterns of change?
→ How are the shapes of cost curves related to the shape of the product curves we did last time?