AP Microeconomics

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# AP Microeconomics - PowerPoint PPT Presentation

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?.

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## AP Microeconomics

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### 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

____ Security guards on premises

____ Property Taxes

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):
• 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