5
FIRM BEHAVIOUR AND THE
ORGANIZATION OF INDUSTRY
The Costs of
Production
Copyright © 2011 Cengage Learning
13
WHAT ARE COSTS?
•  According to the Law of Supply:
•  Firms are willing to produce and sell a greater
quantity of a good when the price of the good is
high.
•  This results in a supply curve that slopes upward.
Copyright © 2011 Cengage Learning
WHAT ARE COSTS?
•  The Firm’s Objective
•  The economic goal of the firm is to maximize
profits.
Copyright © 2011 Cengage Learning
Total Revenue, Total Cost, and Profit
•  Total Revenue
•  The amount a firm receives for the sale of its
output.
•  Total Cost
•  The market value of the inputs a firm uses in
production.
Copyright © 2011 Cengage Learning
Total Revenue, Total Cost, and Profit
•  Profit is the firm’s total revenue minus its total
cost.
Profit = Total revenue - Total cost
Copyright © 2011 Cengage Learning
Costs as Opportunity Costs
•  A firm’s cost of production includes all the
opportunity costs of making its output of goods
and services.
•  Explicit and Implicit Costs
•  A firm’s cost of production include explicit costs
and implicit costs.
•  Explicit costs are input costs that require a direct outlay of
money by the firm.
•  Implicit costs are input costs that do not require an outlay
of money by the firm.
Copyright © 2011 Cengage Learning
Economic Profit versus Accounting Profit
•  Economists measure a firm’s economic profit
as total revenue minus total cost, including both
explicit and implicit costs.
•  Accountants measure the accounting profit as
the firm’s total revenue minus only the firm’s
explicit costs.
Copyright © 2011 Cengage Learning
Economic Profit versus Accounting Profit
•  When total revenue exceeds both explicit and
implicit costs, the firm earns economic profit.
•  Economic profit is smaller than accounting profit.
Copyright © 2011 Cengage Learning
Figure 1 Economic versus Accountants
How an Economist
Views a Firm
How an Accountant
Views a Firm
Economic
profit
Accounting
profit
Revenue
Implicit
costs
Explicit
costs
Revenue
Total
opportunity
costs
Explicit
costs
Copyright©2011 South-Western
PRODUCTION AND COSTS
•  The Production Function
•  The production function shows the relationship
between quantity of inputs used to make a good and
the quantity of output of that good.
Copyright © 2011 Cengage Learning
The Production Function
•  Marginal Product
•  The marginal product of any input in the
production process is the increase in output that
arises from an additional unit of that input.
Copyright © 2011 Cengage Learning
The Production Function
•  Diminishing Marginal Product
•  Diminishing marginal product is the property
whereby the marginal product of an input declines
as the quantity of the input increases.
•  Example: As more and more workers are hired at a firm,
each additional worker contributes less and less to
production because the firm has a limited amount of
equipment.
Copyright © 2011 Cengage Learning
Figure 2 Hungry Horace’s Production Function
Quantity of
Output
(pizzas
per hour)
Production function
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
1
2
3
4
5
Number of Workers Hired
Copyright©2011 South-Western
The Production Function
•  Diminishing Marginal Product
•  The slope of the production function measures the
marginal product of an input, such as a worker.
•  When the marginal product declines, the production
function becomes flatter.
Copyright © 2011 Cengage Learning
From the Production Function to the Total
Cost Curve
•  The relationship between the quantity a firm
can produce and its costs determines pricing
decisions.
•  The total cost curve shows this relationship
graphically.
Copyright © 2011 Cengage Learning
Figure 3 Hungry Horace’s Total Cost Curve
Total
Cost
Total-cost
curve
€ 80
70
60
50
40
30
20
10
0
10 20 30 40 50 60 70
Quantity
of Output
(pizzas per hour)
80 90 100 110 120 130 140 150
Copyright©2011 South-Western
THE VARIOUS MEASURES OF
COST
•  Costs of production may be divided into fixed
costs and variable costs.
Copyright © 2011 Cengage Learning
Fixed and Variable Costs
•  Fixed costs are those costs that do not vary
with the quantity of output produced.
•  Variable costs are those costs that do vary with
the quantity of output produced.
Copyright © 2011 Cengage Learning
Fixed and Variable Costs
•  Total Costs
• 
• 
• 
• 
Total Fixed Costs (TFC)
Total Variable Costs (TVC)
Total Costs (TC)
TC = TFC + TVC
Copyright © 2011 Cengage Learning
Table 2 The Various Measures of Cost: Thirsty
Virgil’s Lemonade Stand
Copyright©2011 South-Western
Fixed and Variable Costs
•  Average Costs
•  Average costs can be determined by dividing the
firm’s costs by the quantity of output it produces.
•  The average cost is the cost of each typical unit of
product.
Copyright © 2011 Cengage Learning
Fixed and Variable Costs
•  Average Costs
• 
• 
• 
• 
Average Fixed Costs (AFC)
Average Variable Costs (AVC)
Average Total Costs (ATC)
ATC = AFC + AVC
Copyright © 2011 Cengage Learning
Average Costs
Fixed cost FC
AFC =
=
Quantity
Q
Variable cost VC
AVC =
=
Quantity
Q
Total cost TC
ATC =
=
Quantity
Q
Copyright © 2011 Cengage Learning
Fixed and Variable Costs
•  Marginal Cost
•  Marginal cost (MC) measures the increase in total
cost that arises from an extra unit of production.
•  Marginal cost helps answer the following question:!
•  How much does it cost to produce an additional unit of
output?
Copyright © 2011 Cengage Learning
Marginal Cost
(change in total cost) ΔTC
MC =
=
(change in quantity)
ΔQ
Copyright © 2011 Cengage Learning
Marginal Cost
Thirsty Virgil’s Lemonade Stand
Quantity
Total
Cost
0
1
2
3
4
5
€3.00
3.30
3.80
4.50
5.40
6.50
Marginal
Cost
—
€0.30
0.50
0.70
0.90
1.10
Quantity
6
7
8
9
10
Total
Cost
€7.80
9.30
11.00
12.90
15.00
Marginal
Cost
€1.30
1.50
1.70
1.90
2.10
Copyright © 2011 Cengage Learning
Figure 4 Thirsty Virgil’s Total Cost Curve
Total Cost
Total-cost curve
€15.00
14.00
13.00
12.00
11.00
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0
1
2
3
4
5
6
7
Quantity
of Output
(glasses of lemonade per hour)
8
9
10
Copyright©2011 South-Western
Figure 5 Thirsty Virgil’s Average Cost and Marginal Cost
Curves
Costs
€ 3.50
3.25
3.00
2.75
2.50
2.25
MC
2.00
1.75
1.50
ATC
1.25
AVC
1.00
0.75
0.50
AFC
0.25
0
1
2
3
4
5
6
7
8
Quantity
of Output
(glasses of lemonade per hour)
9
10
Copyright©2011 South-Western
Cost Curves and Their Shapes
•  Marginal cost rises with the amount of output
produced.
•  This reflects the property of diminishing marginal
product.
Copyright © 2011 Cengage Learning
Figure 5 Thirsty Virgil’s Average-Cost and Marginal-Cost
Curves
Costs
€ 3.50
3.25
3.00
2.75
2.50
2.25
MC
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
1
2
3
4
5
6
7
8
Quantity
of Output
(glasses of lemonade per hour)
9
10
Copyright©2010 South-Western
Cost Curves and Their Shapes
•  The average total-cost curve is U-shaped.
•  At very low levels of output average total cost
is high because fixed cost is spread over only a
few units.
•  Average total cost declines as output increases.
•  Average total cost starts rising because average
variable cost rises substantially.
Copyright © 2011 Cengage Learning
Cost Curves and Their Shapes
•  The bottom of the U-shaped ATC curve occurs
at the quantity that minimizes average total
cost. This quantity is sometimes called the
efficient scale of the firm.
Copyright © 2011 Cengage Learning
Figure 5 Thirsty Virgil’s Average Cost and Marginal Cost
Curves
Costs
€ 3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
ATC
1.50
1.25
1.00
0.75
0.50
0.25
0
1
2
3
4
5
6
7
8
Quantity
of Output
(glasses of lemonade per hour)
9
10
Copyright©2011 South-Western
Cost Curves and Their Shapes
•  Relationship between Marginal Cost and
Average Total Cost
•  Whenever marginal cost is less than average total
cost, average total cost is falling.
•  Whenever marginal cost is greater than average
total cost, average total cost is rising.
Copyright © 2011 Cengage Learning
Cost Curves and Their Shapes
•  Relationship Between Marginal Cost and
Average Total Cost
•  The marginal cost curve crosses the average total
cost curve at the efficient scale.
•  Efficient scale is the quantity that minimizes average total
cost.
Copyright © 2011 Cengage Learning
Figure 5 Thirsty Virgil’s Average Cost and Marginal Cost
Curves
Costs
€ 3.50
3.25
3.00
2.75
2.50
2.25
MC
2.00
1.75
ATC
1.50
1.25
1.00
0.75
0.50
0.25
0
1
2
3
4
5
6
7
8
Quantity
of Output
(glasses of lemonade per hour)
9
10
Copyright©2011 South-Western
Typical Cost Curves
It is now time to examine the
relationships that exist between the
different measures of cost.
Copyright © 2011 Cengage Learning
Berit’s Cost Curves
Copyright © 2011 Cengage Learning
Figure 6 Berit’s Cost Curves
(a) Total Cost Curve
Total
Cost
TC
€18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0
2
4
6
8
10
12
14
Quantity of Output (bagels per hour)
Copyright©2011 South-Western
Figure 6 Berit’s Cost Curves
(b) Marginal and Average Cost Curves
Costs
€ 3.00
2.50
MC
2.00
1.50
ATC
AVC
1.00
0.50
AFC
0
2
4
6
8
10
12
14
Quantity of Output (bagels per hour)
Copyright©2011 South-Western
Typical Cost Curves
•  Three Important Properties of Cost Curves
•  Marginal cost eventually rises with the quantity of
output.
•  The average total cost curve is U-shaped.
•  The marginal cost curve crosses the average total
cost curve at its lowest point.
Copyright © 2011 Cengage Learning
COSTS IN THE SHORT RUN AND
IN THE LONG RUN
•  For many firms, the division of total costs
between fixed and variable costs depends on the
time horizon being considered.
•  In the short run, some costs are fixed.
•  In the long run, fixed costs become variable costs.
Copyright © 2011 Cengage Learning
COSTS IN THE SHORT RUN AND
IN THE LONG RUN
•  Because many costs are fixed in the short run
but variable in the long run, a firm’s long-run
cost curves differ from its short-run cost curves.
Copyright © 2011 Cengage Learning
Figure 7 Average Total Cost in the Short and Long Run
Average
Total
Cost
ATC in short
run with
small factory
ATC in short ATC in short
run with
run with
medium factory large factory
€ 12,000
ATC in long run
0
1,200
Quantity of
Cars per Day
Copyright©2011 South-Western
Economies and Diseconomies of Scale
•  Economies of scale refer to the property
whereby long-run average total cost falls as the
quantity of output increases.
•  Diseconomies of scale refer to the property
whereby long-run average total cost rises as the
quantity of output increases.
•  Constant returns to scale refers to the property
whereby long-run average total cost stays the
same as the quantity of output increases
Copyright © 2011 Cengage Learning
Figure 7 Average Total Cost in the Short and Long Run
Average
Total
Cost
ATC in short
run with
small factory
ATC in short ATC in short
run with
run with
medium factory large factory
ATC in long run
€ 12,000
10,000
Economies
of
scale
0
Constant
returns to
scale
1,000 1,200
Diseconomies
of
scale
Quantity of
Cars per Day
Copyright©2011 South-Western
WHAT IS A COMPETITIVE
MARKET?
•  A perfectly competitive market has the
following characteristics:
•  There are many buyers and sellers in the market.
•  The goods offered by the various sellers are largely
the same.
•  Firms can freely enter or exit the market.
Copyright © 2011 Cengage Learning
WHAT IS A COMPETITIVE
MARKET?
•  As a result of its characteristics, the perfectly
competitive market has the following outcomes:
•  The actions of any single buyer or seller in the
market have a negligible impact on the market
price.
•  Each buyer and seller takes the market price as
given.
Copyright © 2011 Cengage Learning
WHAT IS A COMPETITIVE
MARKET?
•  A competitive market has many buyers and
sellers trading identical products so that each
buyer and seller is a price taker.
•  Buyers and sellers must accept the price determined
by the market.
Copyright © 2011 Cengage Learning
The Revenue of a Competitive Firm
•  Total revenue for a firm is the selling price
times the quantity sold.
TR = (P × Q)
Copyright © 2011 Cengage Learning
The Revenue of a Competitive Firm
•  Total revenue is proportional to the amount of
output.
Copyright © 2011 Cengage Learning
The Revenue of a Competitive Firm
•  Average revenue tells us how much revenue a
firm receives for the typical unit sold.
•  Average revenue is total revenue divided by the
quantity sold.
Copyright © 2011 Cengage Learning
The Revenue of a Competitive Firm
•  In perfect competition, average revenue equals
the price of the good.
Total revenue
Average Revenue =
Quantity
Price × Quantity
=
Quantity
= Price
Copyright © 2011 Cengage Learning
The Revenue of a Competitive Firm
•  Marginal revenue is the change in total revenue
from an additional unit sold.
MR =ΔTR/ ΔQ
Copyright © 2011 Cengage Learning
The Revenue of a Competitive Firm
•  For competitive firms, marginal revenue equals
the price of the good.
Copyright © 2011 Cengage Learning
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
•  The goal of a competitive firm is to maximize
profit.
•  This means that the firm will want to produce
the quantity that maximizes the difference
between total revenue and total cost.
Copyright © 2011 Cengage Learning
Table 2 Profit Maximization: A Numerical Example
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
Figure 1 Profit Maximization for a Competitive Firm
Costs
and
Revenue
The firm maximizes
profit by producing
the quantity at which
marginal cost equals
marginal revenue.
MC
MC2
ATC
P = MR1 = MR2
AVC
P = AR = MR
MC1
0
Q1
QMAX
Q2
Quantity
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
•  Profit maximization occurs at the quantity
where marginal revenue equals marginal cost.
Copyright © 2011 Cengage Learning
PROFIT MAXIMIZATION AND THE
COMPETITIVE FIRM’S SUPPLY CURVE
•  When MR > MC the firm should increase Q to
increase profit
•  When MR < MC the firm should decrease Q
to increase profit
•  When MR = MC profit is maximized.
Copyright © 2011 Cengage Learning
Figure 2 Marginal Cost as the Competitive Firm’s Supply
Curve
Price
P2
This section of the
firm’s MC curve is
also the firm’s supply
curve.
MC
ATC
P1
AVC
0
Q1
Q2
Quantity
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
The Firm’s Short-Run Decision to Shut
Down
•  A shutdown refers to a short-run decision not to
produce anything during a specific period of
time because of current market conditions.
•  Exit refers to a long-run decision to leave the
market.
Copyright © 2011 Cengage Learning
The Firm’s Short-Run Decision to Shut
Down
•  The firm considers its sunk costs when deciding
to exit, but ignores them when deciding whether
to shut down.
•  Sunk costs are costs that have already been
committed and cannot be recovered.
Copyright © 2011 Cengage Learning
The Firm’s Short-Run Decision to Shut
Down
•  The firm shuts down if the revenue it gets from
producing is less than the variable cost of
production.
•  Shut down if TR < VC
•  Shut down if TR/Q < VC/Q
•  Shut down if P < AVC
Copyright © 2011 Cengage Learning
Figure 3 The Competitive Firm’s Short Run Supply Curve
Costs
If P > ATC, the
firm will continue
to produce at a
profit.
Firm’s short-run
supply curve
MC
ATC
If P > AVC, firm
will continue to
produce in the
short run.
AVC
Firm
shuts
down if
P < AVC
0
Quantity
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
The Firm’s Short-Run Decision to Shut
Down
•  The portion of the marginal cost curve that lies
above average variable cost is the competitive
firm’s short-run supply curve.
Copyright © 2011 Cengage Learning
The Firm’s Long-Run Decision to Exit or
Enter a Market
•  In the long run, the firm exits if the revenue it
would get from producing is less than its total
cost.
•  Exit if TR < TC
•  Exit if TR/Q < TC/Q
•  Exit if P < ATC
Copyright © 2011 Cengage Learning
The Firm’s Long-Run Decision to Exit or
Enter a Market
•  A firm will enter the industry if such an action
would be profitable.
•  Enter if TR > TC
•  Enter if TR/Q > TC/Q
•  Enter if P > ATC
Copyright © 2011 Cengage Learning
Figure 4 The Competitive Firm’s Long-Run Supply Curve
Costs
Firm’s long-run
supply curve
Firm
enters if
P > ATC
MC = long-run S
ATC
Firm
exits if
P < ATC
0
Quantity
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
•  The competitive firm’s long-run supply curve
is the portion of its marginal cost curve that lies
above average total cost.
Copyright © 2011 Cengage Learning
Figure 4 The Competitive Firm’s Long-Run Supply Curve
Costs
MC
Firm’s long-run
supply curve
ATC
0
Quantity
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
•  Short-Run Supply Curve
•  The portion of its marginal cost curve that lies
above average variable cost.
•  Long-Run Supply Curve
•  The marginal cost curve above the minimum point
of its average total cost curve.
Copyright © 2011 Cengage Learning
Figure 5 Profit as the Area between Price and Average
Total Cost
(a) A Firm with Profits
Price
MC
ATC
Profit
P
ATC
P = AR = MR
0
Quantity
Q
(profit-maximizing quantity)
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
Figure 5 Profit as the Area between Price and Average
Total Cost
(b) A Firm with Losses
Price
MC
ATC
ATC
P
P = AR = MR
Loss
0
Q
(loss-minimizing quantity)
Quantity
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
THE SUPPLY CURVE IN A
COMPETITIVE MARKET
•  Market supply equals the sum of the quantities
supplied by the individual firms in the market.
Copyright © 2011 Cengage Learning
The Short Run: Market Supply with a Fixed
Number of Firms
•  For any given price, each firm supplies a
quantity of output so that its marginal cost
equals price.
•  The market supply curve reflects the individual
firms’ marginal cost curves.
Copyright © 2011 Cengage Learning
Figure 6 Market Supply with a Fixed Number of Firms
(a) Individual Firm Supply
(b) Market Supply
Price
Price
MC
Supply
€ 2.00
€ 2.00
1.00
1.00
0
100
200
Quantity (firm)
0
100,000
200,000 Quantity (market)
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
The Long Run: Market Supply with Entry and
Exit
•  Firms will enter or exit the market until profit is
driven to zero.
•  In the long run, price equals the minimum of
average total cost.
•  The long-run market supply curve is horizontal
at this price.
Copyright © 2011 Cengage Learning
Figure 7 Market Supply with Entry and Exit
(a) Firm’s Zero-Profit Condition
(b) Market Supply
Price
Price
MC
ATC
P = minimum
ATC
0
Supply
Quantity (firm)
0
Quantity (market)
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
The Long Run: Market Supply with Entry and
Exit
•  At the end of the process of entry and exit,
firms that remain must be making zero
economic profit.
•  The process of entry and exit ends only when
price and average total cost are driven to
equality.
•  Long-run equilibrium must have firms
operating at their efficient scale.
Copyright © 2011 Cengage Learning
Why Do Competitive Firms Stay in Business
If They Make Zero Profit?
•  Profit equals total revenue minus total cost.
•  Total cost includes all the opportunity costs of
the firm.
•  In the zero-profit equilibrium, the firm’s
revenue compensates the owners for the time
and money they expend to keep the business
going.
Copyright © 2011 Cengage Learning
A Shift in Demand in the Short Run and
Long Run
•  An increase in demand raises price and quantity
in the short run.
•  Firms earn profits because price now exceeds
average total cost.
Copyright © 2011 Cengage Learning
Figure 8 An Increase in Demand in the Short Run and Long
Run
(a) Initial Condition
Market
Firm
Price
Price
MC
ATC
P1
Short-run supply,
S1
P1
A
Long-run
supply
Demand, D1
0
Quantity (firm)
0
Q1
Quantity (market)
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
Figure 8 An Increase in Demand in the Short Run and Long
Run
(b) Short-Run Response
Market
Firm
Price
Price
Profit
MC
ATC
P2
B
P2
P1
P1
S1
A
D2
Long-run
supply
D1
0
Quantity (firm)
0
Q1
Q2
Quantity (market)
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
Figure 8 An Increase in Demand in the Short Run and Long
Run
(c) Long-Run Response
Market
Firm
Price
Price
MC
ATC
P1
B
P2
P1
S1
S2
C
A
Long-run
supply
D2
D1
0
Quantity (firm)
0
Q1
Q2
Q3 Quantity (market)
Copyright
Copyright©2011
© 2011 Cengage
South-Western
Learning
Why the Long-Run Supply Curve Might Slope
Upward
•  Some resources used in production may be
available only in limited quantities.
•  Firms may have different costs.
Copyright © 2011 Cengage Learning
Why the Long-Run Supply Curve Might Slope
Upward
•  Marginal Firm
•  The marginal firm is the firm that would exit the
market if the price were any lower.
Copyright © 2011 Cengage Learning
Summary
•  Because a competitive firm is a price taker, its
revenue is proportional to the amount of output
it produces.
•  The price of the good equals both the firm’s
average revenue and its marginal revenue.
Copyright © 2011 Cengage Learning
Summary
•  To maximize profit, a firm chooses the quantity
of output such that marginal revenue equals
marginal cost.
•  This is also the quantity at which price equals
marginal cost.
•  Therefore, the firm’s marginal cost curve is its
supply curve.
Copyright © 2011 Cengage Learning
Summary
•  In the short run, when a firm cannot recover its
fixed costs, the firm will choose to shut down
temporarily if the price of the good is less than
average variable cost.
•  In the long run, when the firm can recover both
fixed and variable costs, it will choose to exit if
the price is less than average total cost.
Copyright © 2011 Cengage Learning
Summary
•  In a market with free entry and exit, profits are
driven to zero in the long run and all firms
produce at the efficient scale.
•  Changes in demand have different effects over
different time horizons.
•  In the long run, the number of firms adjusts to
drive the market back to the zero-profit
equilibrium.
Copyright © 2011 Cengage Learning
Summary
•  The goal of firms is to maximize profit, which
equals total revenue minus total cost.
•  When analysing a firm’s behavior, it is
important to include all the opportunity costs of
production.
•  Some opportunity costs are explicit while other
opportunity costs are implicit.
Copyright © 2011 Cengage Learning
Summary
•  A firm’s costs reflect its production process.
•  A typical firm’s production function gets flatter
as the quantity of input increases, displaying the
property of diminishing marginal product.
•  A firm’s total costs are divided between fixed
and variable costs. Fixed costs do not change
when the firm alters the quantity of output
produced; variable costs do change as the firm
alters quantity of output produced.
Copyright © 2011 Cengage Learning
Summary
•  Average total cost is total cost divided by the
quantity of output.
•  Marginal cost is the amount by which total cost
would rise if output were increased by one unit.
•  The marginal cost always rises with the
quantity of output.
•  Average cost first falls as output increases and
then rises.
Copyright © 2011 Cengage Learning
Summary
•  The average total cost curve is U-shaped.
•  The marginal cost curve always crosses the
average total cost curve at the minimum of
ATC.
•  A firm’s costs often depend on the time horizon
being considered.
•  In particular, many costs are fixed in the short
run but variable in the long run.
Copyright © 2011 Cengage Learning