Short Run Costs

Short Run Costs

In this note we consider production costs in the short term, especially in the difference between fixed and variable costs and the relations between marginal and average costs.

In the short term, because it is consistent and at least one of the factors of production, and production can be increased only by adding more variables. Therefore, we consider both fixed and variable costs

Fixed costs

Fixed costs are business expenses that do not vary directly with the level of production that is treated as independent of the level of production.

Examples of fixed costs and the costs include rental of premises, and the cost of rental or purchase of capital equipment such as factories and machinery and the proportion of the annual business charged by local authorities, and the cost of full-time salaried employees of contractors, and the cost of interest payments meeting on the loans, and depreciation of fixed capital (only because of age) as well as the cost of commercial insurance.

Fixed costs and overhead costs to work. It is important in markets where fixed costs are high, but variable costs associated with making a slight increase in production is relatively low. Will get back to this when we look at economies of scale .

v  Total fixed costs            (TFC)           =     remain constant as output increases

v  Average fixed cost          (AFC)    =          total fixed costs divided by output

Must fall an average fixed costs down while increasing production because it is the distribution of the total fixed costs at a higher level of production. In industries where the ratio of fixed to variable costs is very high, there is considerable scope for business to exploit the lower fixed costs per unit if it can be produced in a size large enough. Consider the new Sony Play Station Portable. Fixed costs of product development is enormous, but these costs can be divided by millions of individual units that are sold all over the world.

Any change in fixed costs has no effect on marginal costs. Marginal costs do not relate only to variable costs!

Variable Costs

Variable costs are costs that vary directly with output. Examples of variable costs include the costs of raw materials and other components, and the wages of part-time staff or staff paid by the hour, and the costs of electricity, gas and depreciation of capital inputs due to wear and tear. Average variable cost (AVC) = Total variable costs (TVC) / output (Q)

Average Total Cost (ATC or AC)

Average total cost is simply the cost per unit produced
Average total cost (ATC) = total cost (TC) / output (Q)

Marginal Cost

Marginal cost is the change in total costs from increasing output by one extra unit.

Associated with the marginal cost of providing an additional unit of production with the marginal productivity of labor. Law of diminishing returns means that the marginal cost of production will rise with the increase in production. In the end, will result in higher marginal cost to the increase of the average total cost. This occurs when the rise in AVC is greater than the decline in Asia, where the increase (Q) output.

Short Run Cost Curves

When revenues decline set in (Q1 outside of production) and the marginal cost curve begins to rise. Average total cost continues to decrease until the output Q2, where the increase in the average variable cost is equal with the lower average fixed cost. Q2 output is the lowest point in the ATC curve for this work in the short term. This is known as the output of the production efficiency.

A change in variable costs

A rise in variable production costs leads to a shift to higher in both total cost and average marginal. The Company is not able to provide much in the same price as output. The result is that the shift to the inside of the supply curve to work in a competitive market.

Increase in fixed costs has no effect at all on the variable costs of production. This only means that the average total cost curve shifts. There is no change at all on the marginal cost curve that leads to any change in the profit-maximizing price and output of business. Show the effects of any increase in fixed costs or overheads of the business sector in the graph below.