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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?.

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ap microeconomics

AP Microeconomics

Costs in the Short Run

how would you label each of these curves
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 curves1
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
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
slide5
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
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 run1
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 run2
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
can you distinguish between fixed costs fc and variable costs vc
____ 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 run3
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 run4
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 run5
Costs in the Short Run
  • Average Fixed Cost (AFC):
  • sometimes called spreading overhead;
  • AFC = TFC

q

slide13
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
computing graphing

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 run6
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.
slide16

$0

$0

$12

$14

$20

$18

$24

$26

graphing tvc
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