XXI. SHORT RUN COSTS

(The first section of this note was written by Roger Adkins at Marshall University for his principles of microeconomics classes and is used with his permission.)

A. Introduction

In the short run, the costs associated with adding more capital (the fixed factor) are held constant, because we add no capital in the short run, by definition. Our total costs (TC) of production can be broken down into two classes at first (we will delineate more later on): 1) fixed costs (FC), a constant; and 2) variable costs (VC). We can think of these costs in several ways‑‑we may be concerned with the entire costs, we may be concerned with costs per unit, average costs (AC), or we may be concerned with the additional costs from producing one more unit marginal costs (MC).

B. From Total Product to Total Variable Cost, Total Average Cost, and Total Cost

For now, assume that there are only two factors of production required to produce some good "x", a fixed factor and a variable factor. Also, for sake of the example, assume that each unit of the variable factor adds one dollar to our costs (the price of the factor is one dollar per unit). Using TABLE VI in the previous section for our example, multiply one dollar times each unit of the variable factor. This gives us the total variable costs (VC) at each of the levels of output or total product listed in column (2). Plot these costs on the vertical axis of a diagram and the total product or output on the horizontal axis. What you have just plotted is the total variable cost curve. Plot a constant two dollars at each level of output and you have the total fixed costs (FC) if the capital you now have costs two dollars per year. If you add the total fixed costs to the total variable costs you have total costs. Plot this as well.

C. From Total Cost to Average Cost

To get the average costs, divide the associated total cost by output. Average fixed cost (AFC), or fixed cost per unit, is total fixed cost divided by output. Average variable cost (AVC), or variable cost per unit, is total variable cost divided by output. Average total cost (ATC), or total cost per unit, is total cost divided by output. Using the figures from TABLE VI and a two dollar fixed cost, compute these average costs for each unit of output given on the table.

D. Marginal Cost

To get marginal cost (MC), divide the change in total cost or the change in total variable cost by the change in output. Plot the marginal cost, average variable cost, and average fixed cost on one diagram. Do the average costs exhibit the relationship between averages and marginals we saw earlier (MARGINAL VERSUS AVERAGE VALUES)?

Classroom Example: (written by Morris Coats)

Taylor, Chs. 6 & 8 Getting Behind the Supply Curve

Costs and Firm Behavior

· Production Functions and Costs Functions

· Average Variable Costs and Price

· Fixed Costs and the Irrelevance of Sunk Costs

· Fixed Costs in the Short Run and the Long Run

· Marginal Costs and Marginal Revenues and Maximizing Profits

Production Functions and Cost Functions

Starting with a simple relationship between Labor input (L) and output (Q) in Table 9, the rest of the values in the table can be derived (see definitions/formulas below).

Table 9. Production and Cost Relationships

L	Q	MPL	APL	VC	FC	TC	AVC	ATC	MC
0	0	---	---	0	25	25	---	---	---
1	10	10	10.000	5	25	30	0.500	3.000	0.500
2	25	15	12.500	10	25	35	0.400	1.400	0.333
3	42	17	14.000	15	25	40	0.357	0.952	0.294
4	57	15	14.250	20	25	45	0.351	0.789	0.333
5	71	14	14.200	25	25	50	0.352	0.704	0.357
6	84	13	14.000	30	25	55	0.357	0.655	0.385
7	95	11	13.571	35	25	60	0.368	0.632	0.455
8	105	10	13.125	40	25	65	0.381	0.619	0.500
9	114	9	12.667	45	25	70	0.395	0.614	0.556
10	122	8	12.200	50	25	75	0.410	0.615	0.625
11	129	7	11.727	55	25	80	0.426	0.620	0.714
12	135	6	11.250	60	25	85	0.444	0.630	0.833
13	140	5	10.769	65	25	90	0.464	0.643	1.000
14	144	4	10.286	70	25	95	0.486	0.660	1.250
15	147	3	9.800	75	25	100	0.510	0.680	1.667
16	149	2	9.313	80	25	105	0.537	0.705	2.500
17	150	1	8.824	85	25	110	0.567	0.733	5.000
18	150	0	8.333	90	25	115	0.600	0.767
19	149	-1	7.842	95	25	120	0.638	0.805
20	147	-2	7.350	100	25	125	0.680	0.850