AP Microeconomics
Costs in the Short Run
How would you label each of these
curves?
Total
Product


Average
Product
Marginal
Product
How are each of the
three curves derived?
TP: units of labor
and the output they
produce.
How would you label each of these
curves?
Total
Product



Average
Product
Marginal
Product
How are each of the
three curves derived?
AP: TP ÷ Units of
Labor
MP: the extra units
of TP derived from
the addition of one
more unit of labor
What do you think these stages
represent?
 The

Stage 1: Increasing Returns:
 MP

is pos & increasing
Stage 2: Diminishing Returns
 MP

Three Stages of Production
is pos, but decreasing
Stage 3: Negative Returns
 MP
is negative

At what stage of production should a
producer be at?

What more information would you need to
know to determine the exact point of
perfect production?
Costs in the Short Run
Short Run
 *firms face limits imposed by some fixed
factor of production
 *new firms cannot enter and existing firms
cannot leave

Costs in the Short Run

The Total Costs a firm incurs can be
calculated by adding together the firms
fixed costs and variable costs.
TC
= TFC + TVC
Costs in the Short Run

Fixed Costs (TFC):
 costs
that a firm must pay even at a zero
production; in the short run they are constant.

Variable Costs (TVC):
 costs
that depend on the level of production
chosen
Can you distinguish between fixed costs
(FC) and variable costs (VC)?
1.
2.
3.
4.
5.
6.
F Mortgage payments on
____
a factory
____
V Expenses for hot dog
buns at a restaurant
____
V Electric bills at an allelectric print ship
F The cost of a new
____
printing press
V Wages paid to auto
____
workers
____
F Long-term salary
contracts with top
management
7.
8.
9.
10.
11.
12.
F Insurance premiums at a
____
factory
____
V A salesperson’s mileage
expenses
____
F Lease payments on
rented equipment
V Advertising
____
____
F Security guards on
premises
____
F Property Taxes
Costs in the Short Run

Some businesses’ fixed costs make up a larger
portion of their Total Costs. What type of
businesses would have higher fixed costs than
variable costs?

Some businesses’ variable costs make up a
larger portion of their Total Costs. What type of
businesses would have higher variable costs
than fixed costs?
Costs in the Short Run

Total Fixed Costs (TFC), sometimes called
overhead, are those costs that do not
change with output. Firms have no control
over fixed costs in the short run; for this
reason, fixed costs are sometimes called
sunk costs. Because in the short run TFC
are constant, the graph is: c
Horizontal
o
s
t
TFC
Quantity
Costs in the Short Run
Average Fixed Cost (AFC):
 sometimes called spreading overhead;

AFC =
TFC
q


Whereas TFC is a horizontal line, AFC is a
downward sloping line. As output is
increased, AFC will decline getting closer
and closer to zero; however AFC will
never reach zero.

Let’s complete the table and graph it
Computing & Graphing
q
TFC
AFC
0
$1,000
---
1
1,000
$1000
2
1,000
$500
3
1,000
$333.33
4
1,000
$250
5
1,000
$200
1000
TFC
C 750
O
S 500
T
($) 250
0
AFC
1
2 3 4 5
Units of Output
Costs in the Short Run
Total Variable Costs (TVC):
 the sum of those costs that vary with
the level of output in the short run
 This cost depends on the techniques of
production that are available and the
prices of the inputs required by each
technology.

Output
0
1
2
3
Using
Technique
A
B
A
B
A
B
A
B
Units of Input Required
K
L
0
0
4
2
7
4
9
6
0
0
4
6
6
10
6
14
Total Variable Cost
(PK = $2, PL = $1)
$0
$0
$12
$14
$20
$18
$24
$26
Graphing TVC

When graphing Total Variable Cost the graph shows
the relationship between level of output and the Total
Variable Cost with the optimal method of technology
utilized at each output.
Output
TVC
0
0
1
12
2
18
3
24
24
C 16
o
S 8
T
$
0
1
2
3
Units of Output