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    Production and Cost in The Firm Lo 03: Costs in The Short Run

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    maymay sitchon
    The document discusses short-run costs in production, including fixed costs, variable costs, total costs, marginal costs, and average costs. It provides definitions and formulas for each cost type and depicts their relationships through graphs of cost curves. Fixed costs remain constant while variable costs change with output. Total cost is the sum of fixed and variable costs. Marginal cost is the change in total cost from producing an additional unit, while average cost is total cost divided by units of output.

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    Production and Cost in The Firm Lo 03: Costs in The Short Run

    Uploaded by

    maymay sitchon
    33 views4 pages
    The document discusses short-run costs in production, including fixed costs, variable costs, total costs, marginal costs, and average costs. It provides definitions and formulas for each cost type and depicts their relationships through graphs of cost curves. Fixed costs remain constant while variable costs change with output. Total cost is the sum of fixed and variable costs. Marginal cost is the change in total cost from producing an additional unit, while average cost is total cost divided by units of output.

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    The document discusses short-run costs in production, including fixed costs, variable costs, total costs, marginal costs, and average costs. It provides definitions and formulas for each cost type and depicts their relationships through graphs of cost curves. Fixed costs remain constant while variable costs change with output. Total cost is the sum of fixed and variable costs. Marginal cost is the change in total cost from producing an additional unit, while average cost is total cost divided by units of output.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    33 views4 pages

    Production and Cost in The Firm Lo 03: Costs in The Short Run

    Uploaded by

    maymay sitchon
    The document discusses short-run costs in production, including fixed costs, variable costs, total costs, marginal costs, and average costs. It provides definitions and formulas for each cost type and depicts their relationships through graphs of cost curves. Fixed costs remain constant while variable costs change with output. Total cost is the sum of fixed and variable costs. Marginal cost is the change in total cost from producing an additional unit, while average cost is total cost divided by units of output.

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    of 4

    PRODUCTION AND COST IN THE FIRM

    LO 03: COSTS IN THE SHORT RUN

    The Short-run Cost is the cost which has short-term implications in the production process, i.e.
    these are used over a short range of output. These are the cost incurred once and cannot be used
    again and again, such as payment of wages, cost of raw materials, etc.

    Following are the cost concepts that are taken into consideration in the short run:

    a. Fixed Costs
    Refer to the costs that remain fixed in the short period. These costs do not change with the
    change in the level of output. For example, rents, interest, and salaries. Fixed costs have
    implication even when the production of an organization is zero. These costs are also called
    supplementary costs, indirect costs, overhead costs, historical costs, and unavoidable costs.

    FC remains constant and independent with respect to change in the level of output. Therefore,
    the slope of FC curve is a horizontal straight line.

    Figure-3 depicts the FC curve:

    As shown in Figure-3, FC curve is horizontal to x- axis. From Figure-3, it can be seen that FC
    remains the same at all the levels with respect to change in the level of output.

    b. Variable Costs (VC):


    Refer to costs that change with the change in the level of production. For example, costs incurred
    on purchasing raw material, hiring labor, and using electricity. If the output is zero, then the
    variable cost is also zero. These costs are also called prime costs, direct costs, and avoidable
    costs.
    Figure-4 shows the VC curve:

    In Figure-4, it can be seen that VC curve changes with the change in the level of output.

    The below are the Key Differences between both:

     Fixed cost is a cost that remains same regardless of volume of production while
    variable cost changes with the level of production.
     Fixed cost is a time related while variable cost is a volume related.
     Fixed cost are required to pay whether there is production or not. Variable costs only
    occurred when there is production.
     Variable costs remains same per unit while fixed cost per unit changes. In case of large
    production, per unit fixed cost decrease and vice versa.
     Examples of fixed costs are: depreciation, rent, salary, insurance, tax etc. Examples of
    variable costs are: material consumed, wages, commission on sales, packaging
    expenses, etc.

    c. Total Cost (TC):


    Involves the sum of FC and VC.

    It can be calculated as follows:


    Total Cost = FC + VC

    TC also changes with the changes in the level of output as there is a change in VC.

    Figure-5 shows the total cost curve derived from sum of VC and FC:
    It should be noted that both VC and TC increase initially at decreasing rate and then they
    increase at increasing rate Here, decreasing rate implies that the rate at which cost increases with
    respect to output is less, whereas increasing rate implies the rate at which cost increases with
    respect to output is more.

    d. Marginal Cost:
    Refer to the addition to the total cost for producing an additional unit of the product.

    Marginal cost is calculated as:


    MC = TCn = TCn-1
    n= Number of units produced

    It is also calculated as:


    MC = ∆TC/∆Output
    MC curve is also a U-shaped curve as marginal cost initially decreases as output increases and
    afterwards, rises as output increases. This is because TC increases at decreasing rate and then
    increases at increasing rate.

    Figure- 9 shows the MC curve:

    e. Average Cost (AC):


    Refer to the total costs of production per unit of output.

    AC is calculated as:
    AC = TC/ Output

    AC is also equal to the sum total of AFC and AVC. AC curve is also U-shaped curve as average
    cost initially decreases when output increases and then increases when output increases.

    Figure-8 shows the AC curve:

    RELATIONSHIP BETWEEN MARGIINAL COST AND AVERAGE COST

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