Short-Run Costs of Production
- The ‘short-run’ is the period of time when at least one factor of production (usually capital) is in fixed supply.
- g. a cinema doesn’t have the time to sell its buildings of end a contract in the short-run
- In the short-run, some costs will be fixed or variable
- Fixed costs are costs that don’t change in the short-run with changes in output (e.g. the rent for a building
- Variable costs are costs that change with changes in output (e.g. the cost of popcorn sold to cinema goers)
- For costs like labour, it can be difficult to decide whether they’re fixed or variable
- The deciding factor will be whether the costs change with output in the short run.
- Overtime and bonus payments will vary with output, but the fixed wage rate paid to permanent staff will not.
Total, Average and Marginal Costs in the Short Run
- Total cost (TC) is the total cost of producing at a given output.
- It is made up of fixed and variable costs in the short-run
- As output rises, total cost increases
- Average Cost (AC) (also called unit cost) is total cost divided by output (TC/q)
- g. if a TV company produces 20 hours of TV programs a week, and its total costs are £300,000 a week, AC = £15,000
- AC can be split into Average Fixed and Average Variable costs (AFC and AVC) in the short-run
- AFC will decrease with output, as their fixed costs will be spread more thinly.
- AVC tends to fall at first, and then rises
- This occurs because initially, whilst firms increase output, resources are employed more efficiently
- Then, at a certain output level, the fixed supply of at least one factor of production becomes more of a problem, and the combination of resources becomes less efficient.
- Marginal Cost (MC) is the change in total cost resulting from changing output by one unit
- MC influences AC, as falls in MC reduce AC and rises in MC increase AC.
- An MC curve will cut both AC and AVC curves at their lowest points.