1. CHAPTER 10 Cost Curves

2. Short-Run & Long-Run Cost Functions Fixed costs Fixed factors of production Don’t change with output Variable costs Variable factors of production Change with output 2

3. short-run production functions 3 A short-run production function: capital is fixed and output is a function only of labor Labor 0 Output C B A x Total output curve (given capital= )

4. Short-Run Cost Concepts Short-run total cost function Total cost of producing output Capital = fixed input For output = 0 Total cost = Fixed cost (capital) Short-run average cost curve (SRAC) Total cost divided by total quantity U-shaped Short-run marginal cost curve (SRMC) Incremental cost Produce q+1 st output U-shaped 4

5. Short-run cost functions 5 Short-run total cost is the sum of the fixed and variable costs (a)(b) Short-run average cost function: Average cost is the slope of the ray from the origin to a point on the total cost function Output 0 0 Total cost B C A e a α e Short-run average cost (SRAC)

6. 6 (a)(b) MC is the slope of the total cost function At e MC=ATC Output 0 0 Total cost B C A e a α e B Short-run average cost (SRAC) Short-run marginal cost (SRMC) Short-run cost functions

7. Short-Run Cost Concepts SRMC = SRAC When average cost – minimized For SRMC below SRAC Average cost – decreasing For SRMC above SRAC Average cost – increasing 7

8. Short-Run Cost Concepts Short-run average fixed cost function Average fixed cost Total fixed cost divided by total output Output increases Average fixed cost decreases Short-run average variable cost function Average variable cost Variable cost divided by output U-shaped 8

9. Some short-run average cost functions 9 Cost Average fixed cost is always decreasing in output. Average variable and total costs may be U-shaped. Short-run average fixed cost Short-run average total cost Short-run average variable cost Output 0 10015 a b c d Average variable cost Average fixed cost Average total cost

10. Long-Run Cost Concepts All factors of production are variable Long-run cost curve Lower boundary of the short-run cost curves 10

11. Long-run and short-run marginal costs 11 Capital Labor 0 q’ x z A’ q” q* D C Isocost curve 1 Isocost curve 2 Isocost curve 3 Isocost curve 4

12. Total cost functions: SR and LR 12 Long-run cost is the minimum short-run cost of producing that quantity of output Output 0 Short-run total cost Cost curve 2 (10 units of capital) Cost curve 3 (15 units of capital) z b x

13. The long-run average cost curve 13 Short-run average cost The long-run average cost curve is the lower boundary of the family of short-run average cost curves Quantity 0 Cost curve 2 (10 units of capital) Cost curve 3 (15 units of capital) Cost curve 1 (5 units of capital) a b