Fixed costs, marginal costs and the decision to stay open or shut down. Learn the language of how producers plan in the short run and the long run.
These terms were extracted from Principles of Microeconomics by Dr. Emma Hutchinson, University of Victoria, eCampusOntario which is licensed under a Creative Commons Attribution 4.0 International License. Based on Principles of Microeconomics by OpenStax, licensed under CC BY 4.0.
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the average amount of output each worker can produce; Total product/Total output
Backtracking slightly, the same analysis can be done for the Average Product of Labour, which can also be used to derive the AVC curve.
total cost divided by the quantity of output
Average total cost is an average of our total variable cost and total fixed costs.
ariable cost divided by the quantity of output
Sometimes, we want to ignore this variation and calculate the average variable cost.
the decrease in the marginal output of a production as input is is incrementally increased
This is the pattern of diminishing marginal returns.
expenditure that must be made before production starts and that does not change regardless of the level of production
This input (or inputs) is classified as a fixed cost since in the short term there is nothing we can do to avoid this cost except quit producing altogether.
the amount of output an additional worker can produce
This example illustrates the marginal product of labour, a concept we will explore in this section.
a period of time in which at least one cost factor is fixed
To start, we want to look at the costs of a single firm in the short run.
the sum of fixed and variable costs of production
As a result, the total costs of production will begin to rise more rapidly as output increases.
cost of production that increases with the quantity produced
To guide our understanding of fixed and variable costs, consider Henry Ford once more.
A point where a firm is making no profits
Another important point is the Break-Even Point where P = ATC.
A point where a firm is only able to cover their variable costs of production
If the price falls below its shut-down point, The Clip Joint will stop operating even in the short run.
total revenues minus explicit costs, including depreciation
These questions stem from the difference between Accounting Profits and Economic Profits.
total revenues minus total costs (explicit plus implicit costs)
These questions stem from the difference between Accounting Profits and Economic Profits.
when firms enter a market enticed by positive profits, causes prices to fall
The competitive market always returns zero profits for its individual firms in the long-run, with entry and exit correcting any short-term deviations.
when firms leave a market due to losses, causes prices to rise
If the price is below The Clip Joint’s break-even price, it will continue to operate in the short-run but exit in the long run.
expanding all inputs proportionately does not change the average cost of production
In this situation, allowing all inputs to expand does not much change the average cost of production, and it is called constant returns to scale.
the long-run average cost of producing each individual unit increases as total output increases
Diseconomies of scale can also be present across an entire firm, not just a large factory.
shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
The economies of scale curve is a long-run average cost curve, because it allows all factors of production to change.
alternative methods of combining inputs to produce output
In planning for the long run, the firm will compare alternative production technologies (or processes).
the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
The short-run average cost curves presented earlier in this chapter assumed the existence of fixed costs, and only variable costs were allowed to change.