Session 13: Costs

Fixed and Variable costs

Opportunity costs of explicit and implicit costs
Short run costs
TC = TFC + TVC
As output increases, as more labour needs to be hired, more resources are needed so TVC increases
TFC is constant at all levels. TFC is the exact difference between TVC and TC, so TC takes the shape of
TVC.
We learn more about the behavior of costs through average and marginal costs.
AFC = TFC/ Q
AVC = TVC / Q
ATC = TC / Q
SMC = TC / Q
SMC = TVC / Q
All the three curves first fall and then as output increases they also rise.
Marginal cost interests ATC and AVC at their minimum point.
SMC is below ATC and AVC when they are falling and above the two when they are rising.
Why does ATC gat as closer to AVC as output increases? Because as output rises AFC keeps getting
smaller.
AVC reaches its minimum before ATC reaches its minimum.
Relation between Short run costs and production.
TVC is derived directly from the short run production function.
AVC can be derived from the average product
SMC can be derived from the marginal product.
Total cost and production function
TVC = w * L

TFC = r * K
TC = w * L + r * K
TVC = w * L if output is Q
Then AVC = TVC / Q = w * L / Q (L / Q is 1/AP)
Hence AVC = w / AP
SMC = TVC / Q = w * L/ Q (which is nothing but 1/MP)
Hence SMC = w/MP