1. Unit 3: Costs of Production and Perfect Competition
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2. Short-Run Production Costs
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3. Definition of the “Short-Run”
We will look at both short-run and long-run production costs.
Short-run is NOT a set specific amount of time.
The short-run is a period in which at least one resource is fixed.
Plant capacity/size is NOT changeable
In the long-run ALL resources are variable
NO fixed resources
Plant capacity/size is changeable
Today we will examine short-run costs 3
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4. Different Economic Costs
Total Costs
FC = Total Fixed Costs
VC = Total Variable Costs
TC = Total Costs
Per Unit Costs
AFC = Average Fixed Costs
AVC = Average Variable Costs
ATC = Average Total Costs
MC = Marginal Cost
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5. Definitions Fixed Costs: Variable Costs:
Costs for fixed resources that DON’T change with the amount produced
Ex: Rent, Insurance, Managers Salaries, etc.
Average Fixed Costs =
Fixed Costs
Quantity
Variable Costs:
Costs for variable resources that DO change as more or less is produced
Ex: Raw Materials, Labor, Electricity, etc.
Average Variable Costs =
Variable Costs
Quantity
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6. Definitions Total Cost: Marginal Cost: Sum of Fixed and Variable Costs
Average Total Cost =
Total Costs
Quantity
Marginal Cost:
Additional costs of an additional output.
Ex: If the production of two more output increases total cost from $100 to $120, the MC is _____.
$10
Marginal Cost =
Change in Total Costs
Change in Quantity
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7. Calculating Costs Notice that the AVC + AFC = ATC ATC of 6 Units
Fill out the chart then
calculate:
ATC of 6 Units
AFC of 2 Units
AVC of 4 Units
ATC of 1 Unit
AVC of 5 Units
AFC of 5 Units
ATC of 5 Units
Output
Variable
Cost
Fixed
Total
Marginal $0
$10 - 1 2
$17 3
$25 4
$40 5
$60 6
$110
$20 $5
$10
$12 $2
$14
Notice that the AVC + AFC = ATC
For 5 Units: AVC ($12) + AFC ($2) = ATC ($14)
Is this is true for 4 Units?
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8. ATC and AVC get closer and closer but NEVER touchMC
Costs
ATC
$20
$18
$16
$14
$12
$10 $8 $6 $4 $2
AVC
ATC and AVC get closer and closer but NEVER touch
Average Fixed Cost
AFC
Quantity
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9. Calculate TC, VC, and FC of the 5th UnitMC
Costs
ATC
$20
$18
$16
$14
$12
$10 $8 $6 $4 $2
AVC
Calculate TC, VC, and FC of the 5th Unit
TC= $70
VC= $60
TC = $10
AFC
Quantity
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10. Total Cost Curves TC FC + VC = TC VC $10 FC Fixed Cost Costs Quantity
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11. Practice 11

12. 2008 Audit Exam
50. c
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13. 1. A C 2.

14. 7.D

15. Calculating Costs Practice
Fill out the chart then
calculate:
ATC of 6 Units
AFC of 2 Units
AVC of 3 Units
ATC of 5 Units
AVC of 2 Units
AVC of 4 Units
AFC of 4 Units
ATC of 4 Units
Output
Variable
Cost
Fixed
Total
Marginal $0
$20 - 1
$12 2
$22 3
$27 4
$40 5
$60 6
$100
$20
$10 $9
$16
$11 $5
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16. How much does the 10th unit costs?MC
$30 25 20 15 10 5
ATC
AVC
Calculate TC, VC, and FC
Total Cost=$200
Variable Cost=$150
Fixed Cost=$50
Notice that VC + FC = TC
AFC
Quantity
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17. Per-Unit Costs (Average and Marginal)
At output Q, what area represents: TC VC FC
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18. More Practice 18

19. Calculating TC, VC, FC, ATC, AFC, and MCTP VC FC TC MC
AVC
AFC
ATC
100 1 10 2 16 3 21 4 26 5 30 6 36 7 46
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20. Shapes of Cost Curves
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21. Why does marginal cost always go down then up?MC
Costs
Quantity
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22. MP and MC are mirror images of each other
Relationship between Production and Cost
Output
As more workers are hired, their marginal product increases and then eventually decreases because of the law of diminishing marginal returns MP
The additional costs (MC) of the units they produce fall when MP goes up, but eventually increase as additional workers produce less and less output
MP and MC are mirror images of each other
Quantity of labor
Costs MC
Quantity of output
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23. Why is the MC curve U-shaped?
Example:
Assume the fixed cost is $20 and the ONLY variable cost is the cost for each worker (Wage = $10)
Workers
Total Prod
Marg Prod
Total Cost
Marginal Cost 1 5 2 13 3 19 4 23 25 6 26
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24. Relationship between Production and Cost Why does ATC go down then up?
Costs MC
ATC
Quantity
MC intersects the ATC curve at ATC’s lowest point
Example:
The average income in the room is $50,000.
An additional (marginal) person enters the room: Bill Gates.
If the marginal is greater than the average it pulls it up.
Notice that MC can increase but still pull down the average.
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25. 2008 Audit Question 23
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26. 2010 Question 18
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27. 1. 2.

28. Shifting Costs Curves TP VC FC TC MC AVC AFC ATC 100 - 1 10 110 2 16
100 - 1 10
110 2 16
116 6 8 50 58 3 21
121 5 7
33.3
30.3 4 26
126
6.5 25
31.5 30
130 20 36
136
16.67
22.67 46
146
6.6
14.3
20.9
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29. What if FC changes to $200? Shifting Costs CurvesTP VC FC TC MC
AVC
AFC
ATC
200 1 10 2 16 3 21 4 26 5 30 6 36 7 46
Which Per Unit Cost Curves Change?
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30. Shift from an increase in a Fixed CostMC
ATC1
ATC
AVC
Costs (dollars)
AFC1
AFC
Quantity
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31. What if the cost for variable resources increase?
Shifting Costs Curves
What if the cost for variable resources increase? TP VC FC TC MC
AVC
AFC
ATC
100 1 11 2 18 3 24 4 30 5 35 6 43 7 55
Which Per Unit Cost Curves Change?
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32. Shift from an increase in a Variable Costs
MC1 MC
ATC1
AVC1
ATC
AVC
Costs (dollars)
AFC
Quantity
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