Short-Run Costs of Production

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    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.

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