Economic Costs
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By the end of this section, you
should be able to…..
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Define and calculate total cost, average cost,
and marginal cost.
Graphically depict the total cost, fixed costs
and variable cost curves.
Discuss the difference between costs in the SR
and in the LR
Know if you have economies of scale,
diseconomies of scale or negative economies
of scale and what that means.
2
Draw the LR cost curve.
Costs Overview
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Costs are looked at in different ways in the
short run and in the long run.
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The short run is a time period in which
producers are able to change the quantities of
some but not all of the resources they employ.
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A firm can adjust the number of workers but not the
plant’s capacity in the short run.
The long run is a time period sufficiently long
to enable producers to change the quantities of
all the resources they employ.
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Short Run Costs

Total Cost: the cost of all the factors of
production used by a firm.
 TC = FC + VC
Total Fixed Costs are the costs of
fixed factors of production used by a
firm. These factors can not be
changed in the short run. Examples
include capital, cost of land, etc.
****There are no fixed costs in the
long run.
Total Variable Costs are the
cost of the variable factors
of production used by a
firm. Example quantity of
labor employed.
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Total Costs
Total Cost Curves
Total Cost
Curve=FC+VC
Variable Cost
Curve
Fixed Cost Curve
Fixed
Costs
Amount
Variable Cost
Amount at a
given output.
Output
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Average Costs
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Q is quantity of output.
Average fixed costs: AFC=TFC/Q
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Average variable costs: AVC=TVC/Q
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Average fixed costs decline as output increases because the total
fixed costs are spread over a larger and larger output.
As added variable resources increase output, average variable
cost declines initially, reaches a minimum, and then increases
again. As a result, AVC is U-shaped.
Average total costs: ATC=TC/Q=AFC+AVC
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Graphically, ATC can be found by vertically adding the AFC
and AVC curves.
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Total Costs vs. Average Costs
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Total Costs look at the costs at a particular
output level.
Average Costs looks at the average amount of
each type of cost over all of the output
produced up to a certain production amount.
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Marginal Cost

Marginal Cost is the change in total cost that
results from a one unit increase in output.
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It is the cost of producing one extra unit of output.
TC
= TC1 – TC2
Q
Q1 - Q2
See how TC changes as output changes.
MC =
Graphically, the MC curve intersects the AVC curve
at its minimum…
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Average and Marginal Cost Curves
$200
MC
Costs
150
AFC
ATC
AVC
100
50
AVC
AFC
0
1
2
3
4
5
6
7
8
9
10
Q
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Numeric Example
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Example: Sam owns a Smoothie Shop
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Suppose Sam produces 5 gallons an hour at a cost of
$26.20 and produces 6 gallons of smoothies an hour at a
total cost of $28.00.
Total Costs
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Average Costs
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Total Cost at 5 Gallons = $26.20
Total Cost at 6 Gallons = $28.00
Average Cost at 5 Gallons = $5.24 (=TC/Q=$26.20/5)
Average Cost at 6 Gallons = $4.67 (=TC/Q=$28.00/6)
Marginal Costs

Marginal Cost at 6 Gallons = $1.80 (= TC/ Q=(28.00-26.20)/(6-5)
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Long Run Costs

In the Long Run, the firm can vary the quantity
of labor (L) (variable in the short run) and
quantity of capital (K) (fixed in the short run).
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Changing Amount of Labor and
Capital Could Cause 1 of 3 Things
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Economies of Scale: Output increases by an
even higher % than the % a firm increases its
inputs (K and L) by.
Diseconomies of Scale: Output increases by a
smaller % than the % a firm increases its
inputs by.
Constant Returns to Scale: Output increases by
the same % that a firm increases its inputs by.
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Average Total Costs
Long-Run ATC Curve
ATC-1
Constant Returns to Scale
where LRATC Curve isATC-5
flat
ATC-2
ATC-3
ATC-4
Long-Run
ATC
Diseconomies of
Scale where
LRATC Curve is
sloped upward
Economies of Scale
where LRATC Curve
is sloped downward
Output
The long-run ATC curve just “envelopes” the short run ATCs
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