D production output cost revenue profit
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The Supply
Decision
Short-run Costs
• Short-run and long-run changes in
production
– fixed and variable factors of production
– the short run
– the long run
• Production in the short run
– the law of diminishing returns
• When one of more factors are held fixed,
there will come a point beyond which the
extra output from additional units of the
variable factor will diminish
Short-run Costs
• Measuring costs of production
– opportunity cost
• explicit costs
• implicit costs
– irrelevance of sunk costs (historic costs)
• Costs and inputs
– costs and the productivity of factors of
production
– costs and the price of factors of
production
– fixed and variable costs
Short-run Costs
• Total cost
– total fixed cost (TFC)
Total costs for firm X
Output TFC
(Q)
(£)
100
0
1
2
3
4
5
6
7
80
60
12
12
12
12
12
12
12
12
40
20
0
0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC
(Q)
(£)
100
0
1
2
3
4
5
6
7
80
60
12
12
12
12
12
12
12
12
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Short-run Costs
• Total cost
– total fixed cost (TFC)
– total variable cost (TVC)
Short-run Costs
• Total cost
– total fixed cost (TFC)
– total variable cost (TVC)
• TVC and the law of diminishing returns
Total costs for firm X
Output TFC
(Q)
(£)
100
0
1
2
3
4
5
6
7
80
60
12
12
12
12
12
12
12
12
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC TVC
(Q)
(£)
(£)
100
0
1
2
3
4
5
6
7
80
60
0
10
16
21
28
40
60
91
12
12
12
12
12
12
12
12
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC TVC
(Q)
(£)
(£)
100
0
1
2
3
4
5
6
7
80
60
0
10
16
21
28
40
60
91
12
12
12
12
12
12
12
12
TVC
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Total costs for firm X
100
TVC
80
Diminishing marginal
returns set in here
60
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Short-run Costs
• Total cost
– total fixed cost (TFC)
– total variable cost (TVC)
• TVC and the law of diminishing returns
– total cost (TC = TFC + TVC)
Total costs for firm X
Output TFC TVC
(Q)
(£)
(£)
100
0
1
2
3
4
5
6
7
80
60
0
10
16
21
28
40
60
91
12
12
12
12
12
12
12
12
TVC
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Output TFC TVC
(Q)
(£)
(£)
100
0
1
2
3
4
5
6
7
80
60
0
10
16
21
28
40
60
91
12
12
12
12
12
12
12
12
Total costs for firm X
TC
(£)
12
22
28
33
40
52
72
103
TVC
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Output TFC TVC
(Q)
(£)
(£)
100
0
1
2
3
4
5
6
7
80
60
0
10
16
21
28
40
60
91
12
12
12
12
12
12
12
12
Total costs for firm X
TC
(£)
TC
12
22
28
33
40
52
72
103
TVC
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Total costs for firm X
TC
100
TVC
80
Diminishing marginal
returns set in here
60
40
20
TFC
0
0
1
2
3
4
5
6
7
8
Short-run Costs
• Average and marginal cost
– marginal cost
Average and marginal costs
Costs (£)
MC
x
Output (Q)
Short-run Costs
• Average and marginal cost
– marginal cost
• marginal cost (MC) and the law of
diminishing returns
Average and marginal costs
Costs (£)
MC
Diminishing marginal
returns set in here
x
Output (Q)
Short-run Costs
• Average and marginal cost
– marginal cost
• marginal cost (MC) and the law of
diminishing returns
• relationship between MC and TC curves
Short-run Costs
• Average and marginal cost
– marginal cost
• marginal cost (MC) and the law of
diminishing returns
• relationship between MC and TC curves
– average cost
Short-run Costs
• Average and marginal cost
– marginal cost
• marginal cost (MC) and the law of
diminishing returns
• relationship between MC and TC curves
– average cost
• average fixed cost (AFC)
Short-run Costs
• Average and marginal cost
– marginal cost
• marginal cost (MC) and the law of
diminishing returns
• relationship between MC and TC curves
– average cost
• average fixed cost (AFC)
• average variable cost (AVC)
