costs in the short run
TRANSCRIPT
Costs in the short run
Learning outcomes
Understand the economist’s
concepts of the short and long
run
Understand the law of diminishing returns
Explain what is meant by fixed
and variable costs
Time periods
The long runthat period of time when firms are able to vary all their factor
inputs
The long runthat period of time when firms are able to vary all their factor
inputs
The short runthat period of time when firms face the problem that some of their factor inputs
cannot be changed (fixed)
The short runthat period of time when firms face the problem that some of their factor inputs
cannot be changed (fixed)
Types of short run costs
Transport examples include:Cost of leasing aircraft, maintenance
of track (Network Rail), vehicle insurance, depreciation and
maintenance (bus & train operators, haulage firms)
Transport examples include:Cost of leasing aircraft, maintenance
of track (Network Rail), vehicle insurance, depreciation and
maintenance (bus & train operators, haulage firms)
Fixed costsCosts which are independent of the
level of output produced
Fixed costsCosts which are independent of the
level of output produced
Types of short run costs
Transport examples include:fuel, driver hours
Transport examples include:fuel, driver hours
Variable costsCosts which are directly dependent
on the level of output produced
Variable costsCosts which are directly dependent
on the level of output produced
Law of diminishing returns
The more of a variable input that is added to a fixed input, eventually the smaller will be
the additional output produced‘too many cooks spoil the broth’
This causes the ‘marginal product’ to decline followed by the ‘average
product’
The more of a variable input that is added to a fixed input, eventually the smaller will be
the additional output produced‘too many cooks spoil the broth’
This causes the ‘marginal product’ to decline followed by the ‘average
product’
Note that before diminishing returns sets in, a firm will experience increasing returns
Task 1: physical product
Calculate the total, marginal and average product from the information given on the task sheet
Draw graphs of these relationships on your task sheet
Total physical product
0
20
40
60
80
100
120
140
160
180
200
220
240
260
0 1 2 3 4 5 6 7 8
Labour employed
Phys
ical
pro
duct
Average and marginal physical product
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
55
0 1 2 3 4 5 6 7 8
Labour employed
Phys
ical
pro
duct
Task 2: costs
The variable and total costs of a firm will be affected by increasing and diminishing returns
Calculate the total cost, average variable, average fixed, average total and marginal cost on the task sheet
Important formula: TC = TFC + TVC ATC = TC / Q AVC = TVC / Q AFC = TFC / Q MC = TC / Q
Fixed, variable and average costs
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2400
0 1 2 3 4 5
Output
Cost
(£)
Average fixed costs
0
20
40
60
80
100
120
140
160
180
200
220
0 1 2 3 4 5
Output
Cost
(£)
Average variable, average total and marginal costs
0
50
100
150
200
250
300
350
400
450
500
550
600
0 1 2 3 4 5
Output
Cost
(£)