Costs and production
Costs
- short run — at least one factor fixed; long run — all factors vary.
| Cost | Meaning |
|---|---|
| fixed cost | doesn't change with output (rent) |
| variable cost | changes with output (materials) |
| total cost | fixed + variable |
| average cost | $AC = TC / Q$ |
| marginal cost | $MC = \Delta TC / \Delta Q$ |
Practice
Total cost is 800 to make 40 units. What is the average cost (in dollars)?
AC = TC ÷ Q = 800 ÷ 40 = 20.
Practice
Which is a fixed cost?
Fixed costs (rent) do not change with output; variable costs (materials) do.
Returns and scale
- Short run: the law of diminishing returns — adding a variable factor to a fixed one eventually adds less output, so MC rises.
- Long run: economies of scale lower average cost as the firm grows; growing too big brings diseconomies of scale.
Practice
The law of diminishing returns (short run) says that adding more of a variable factor eventually:
With a fixed factor, each extra variable unit eventually adds less output, raising marginal cost.
You've got it
Key idea
- fixed (rent) vs variable (materials); AC = TC/Q, MC = ΔTC/ΔQ
- short run: diminishing returns make MC rise
- long run: economies then diseconomies of scale (U-shaped LRAC)