AP Microeconomics

AP Microeconomics Costs in the Short Run

How would you label each of these curves? • How are each of the three curves derived? • TP: units of labor and the output they produce. Total Product Average Product Marginal Product

How would you label each of these curves? • How are each of the three curves derived? • AP: TP ÷ Units of Labor • MP: the extra units of TP derived from the addition of one more unit of labor Total Product Average Product Marginal Product

What do you think these stages represent? • The Three Stages of Production • Stage 1: Increasing Returns: • MP is pos & increasing • Stage 2: Diminishing Returns • MP is pos, but decreasing • Stage 3: Negative Returns • MP is negative

At what stage of production should a producer be at? • What more information would you need to know to determine the exact point of perfect production?

Costs in the Short Run • Short Run • *firms face limits imposed by some fixed factor of production • *new firms cannot enter and existing firms cannot leave

Costs in the Short Run • The Total Costs a firm incurs can be calculated by adding together the firms fixed costs and variable costs. • TC = TFC + TVC

Costs in the Short Run • Fixed Costs (TFC): • costs that a firm must pay even at a zero production; in the short run they are constant. • Variable Costs (TVC): • costs that depend on the level of production chosen

____ Mortgage payments on a factory ____ Expenses for hot dog buns at a restaurant ____ Electric bills at an all-electric print ship ____ The cost of a new printing press ____ Wages paid to auto workers ____ Long-term salary contracts with top management ____ Insurance premiums at a factory ____ A salesperson’s mileage expenses ____ Lease payments on rented equipment ____ Advertising ____ Security guards on premises ____ Property Taxes Can you distinguish between fixed costs (FC) and variable costs (VC)? F F V V V F F V F V F F

Costs in the Short Run • Some businesses’ fixed costs make up a larger portion of their Total Costs. What type of businesses would have higher fixed costs than variable costs? • Some businesses’ variable costs make up a larger portion of their Total Costs. What type of businesses would have higher variable costs than fixed costs?

Costs in the Short Run • Total Fixed Costs (TFC), sometimes called overhead, are those costs that do not change with output. Firms have no control over fixed costs in the short run; for this reason, fixed costs are sometimes called sunk costs. Because in the short run TFC are constant, the graph is: cost Horizontal TFC Quantity

Costs in the Short Run • Average Fixed Cost (AFC): • sometimes called spreading overhead; • AFC = TFC q

Whereas TFC is a horizontal line, AFC is a downward sloping line. As output is increased, AFC will decline getting closer and closer to zero; however AFC will never reach zero. • Let’s complete the table and graph it

C O S T ($) Units of Output Computing & Graphing 1000 --- TFC 750 $1000 500 $500 250 AFC $333.33 $250 0 1 2 3 4 5 $200

Costs in the Short Run • Total Variable Costs (TVC): • the sum of those costs that vary with the level of output in the short run • This cost depends on the techniques of production that are available and the prices of the inputs required by each technology.

$0 $0 $12 $14 $20 $18 $24 $26

When graphing Total Variable Cost the graph shows the relationship between level of output and the Total Variable Cost with the optimal method of technology utilized at each output. Co S T $ Units of Output Graphing TVC Output TVC 0 0 1 12 2 18 3 24 24 16 8 0 1 2 3

AP Microeconomics