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Chapter 10

Chapter 10. Cost Curves. Short-Run & Long-Run Cost Functions. Fixed costs Fixed factors of production Don’t change with output Variable costs Variable factors of production Change with output. short-run production functions. C. B. Output .

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Chapter 10

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  1. Chapter 10 Cost Curves

  2. Short-Run & Long-Run Cost Functions • Fixed costs • Fixed factors of production • Don’t change with output • Variable costs • Variable factors of production • Change with output

  3. short-run production functions C B Output A short-run production function: capital is fixed and output is a function only of labor Total output curve (given capital= ) A x 0 Labor

  4. Short-Run Cost Concepts • Short-run total cost function • Total cost of producing output • Capital = fixed input • For output = 0 • Total cost = Fixed cost (capital) • Short-run average cost curve (SRAC) • Total cost divided by total quantity • U-shaped • Short-run marginal cost curve (SRMC) • Incremental cost • Produce q+1st output • U-shaped

  5. Short-run cost functions A e C B e (a) (b) Total cost Short-run average cost (SRAC) a α Output 0 0 Output Short-run total cost is the sum of the fixed and variable costs Short-run average cost function: Average cost is the slope of the ray from the origin to a point on the total cost function

  6. Short-run cost functions A B e e B C (a) (b) Short-run marginal cost (SRMC) Total cost Short-run average cost (SRAC) a α Output 0 0 Output MC is the slope of the total cost function • At e MC=ATC

  7. Short-Run Cost Concepts • SRMC = SRAC • When average cost – minimized • For SRMC below SRAC • Average cost – decreasing • For SRMC above SRAC • Average cost – increasing

  8. Short-Run Cost Concepts • Short-run average fixed cost function • Average fixed cost • Total fixed cost divided by total output • Output increases • Average fixed cost decreases • Short-run average variable cost function • Average variable cost • Variable cost divided by output • U-shaped

  9. Some short-run average cost functions Cost d c b a Short-run average total cost Short-run average variable cost Average total cost Average fixed cost Average variable cost Short-run average fixed cost 0 Output 15 100 Average fixed cost is always decreasing in output. Average variable and total costs may be U-shaped.

  10. Long-Run Cost Concepts • All factors of production are variable • Long-run cost curve • Lower boundary of the short-run cost curves

  11. Long-run and short-run marginal costs Capital Isocost curve 4 D A’ C q” q’ q* x z Labor 0 Isocost curve 2 Isocost curve 1 Isocost curve 3

  12. Total cost functions: SR and LR Short-run total cost Cost curve 2 (10 units of capital) Cost curve 3 (15 units of capital) z x 0 Output b Long-run cost is the minimum short-run cost of producing that quantity of output

  13. The long-run average cost curve Short-run average cost Cost curve 1 (5 units of capital) Cost curve 2 (10 units of capital) Cost curve 3 (15 units of capital) 0 Quantity b a The long-run average cost curve is the lower boundary of the family of short-run average cost curves

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