Short Term CostsShort Term Costs

Remember: The Short RunRemember: The Short Run

• Short Run: time during which the quantity of at least one factor of production is fixed (frozen)

• Long Run: time that is sufficient to plan for and change all factor quantities

• Typical short-run costs: labor, raw materials, energy

• Typical long-run costs: expensive capital, land

The Production FunctionThe Production Function

• Production function: relationship between factors and products

• Usually shown in Total Product Curve: plot one variable against total production

• Why does the curve rise steeply at first?

• Why does the curve taper off?

Key Production TermsKey Production Terms

• Total Product• Marginal Product: how

much extra production results from one more unit of input (factor)

• Increasing marginal returns: early in the total product graph

• Decreasing marginal returns: middle section of total product graph

• Negative marginal returns: end portion of graph

• Average Product: total product divided by total input (factor)

Graphing Key CostsGraphing Key Costs

• Total Fixed Costs curve• Why would this curve be

a straight horizontal line?

• Average Fixed cost: why would this curve slope gradually downward?

• Total Variable Costs curve

• Why does this curve increase sharply at the far right?

• Total Costs curve• Why does this curve run

parallel to the Total Variable Costs curve?

Graphing Marginal CostGraphing Marginal Cost

• Marginal cost: the total cost of producing one more item

• At first, high marginal cost because output is so small

• Then, increasing efficiency lowers marginal cost

• Finally, marginal cost increases as inefficiencies arise with higher production volume

• Fishhook shaped “J” curve

Putting It All TogetherPutting It All Together

• Average Fixed Cost: decreases with production

• Average Variable Cost: Smiley face starts high, lowers, then increases

• Average Total Cost:• Similar shape as AVC,

but raised by adding AFC

• Marginal Cost: fishhook “J” curve

• Fishhook shaped “J” curve