Cost of Production

BS-BA (2 Years)
Microeconomics
Dr. Ayaz Ahmed
Date: 01/12/2020
Cost Curves
• Fixed costs can’t
change in the short
run
• Variable costs can
change in the short
run
• No relationship
between MC and AFC
Typical Cost Curves
• Three Important Properties of Cost Curves
• Marginal cost eventually rises with the quantity of output.
• The average-total-cost curve is U-shaped.
• The marginal-cost curve crosses the average-total-cost curve at the
minimum of average total cost.
COSTS IN THE SHORT RUN AND IN THE
LONG RUN
• For many firms, the division of total costs between fixed and variable
costs depends on the time horizon being considered.
• In the short run, some costs are fixed.
• In the long run, fixed costs become variable costs.
• Because many costs are fixed in the short run but variable in the long
run, a firm’s long-run cost curves differ from its short-run cost curves.
 Figure 7 Average Total Cost in the Short and Long Run

Average
Total ATC in short ATC in short ATC in short
Cost run with run with run with
small factory medium factory large factory

$12,000

ATC in long run

0 1,200 Quantity of
Cars per Day
Copyright © 2004 South-Western
Short Run Production Costs
F ix ed co st F C
AFC  
Q u an tity Q
V ariab le cost V C
AVC  
Q u an tity Q
T o tal co st T C
ATC  

}
Q u an tity Q
VC
COSTS IN THE SHORT RUN AND IN THE
LONG RUN
• For many firms, the division of total costs between fixed and variable
costs depends on the time horizon being considered.
• In the short run, some costs are fixed.
• In the long run, fixed costs become variable costs.
• Because many costs are fixed in the short run but variable in the long
run, a firm’s long-run cost curves differ from its short-run cost curves.
 Figure 7: Average Total Cost in the Short and Long Run

Average
Total ATC in short ATC in short ATC in short
Cost run with run with run with
small factory medium factory large factory ATC in long run

$12,000

10,000

Economies Constant
of returns to
scale scale Diseconomies
of
scale

0 1,000 1,200 Quantity of

Cars per Day
Copyright © 2004 South-Western
Economies and Diseconomies of Scale
• Economies of scale refer to the property whereby
long-run average total cost falls as the quantity of
output increases. (Specialization)
• Economies occur because increasing size allows for
increasingly specialized equipment and increasingly
specialized labor, both of which increase output
beyond the level of the increased inputs
• Economies of scale happen when inputs are
increased by a factor of X and output increases by
more than a factor of X
Economies and Diseconomies of Scale
• Diseconomies of scale refer to the property whereby long-run average
total cost rises as the quantity of output increases. (Coordination
problems)
• When long-run average cost increases as output increases; an
increased quantity of inputs are needed to get the same or smaller
changes in level of output
Economies and Diseconomies of Scale
• Constant returns to scale refers to the property whereby long-run
average total cost stays the same as the quantity of output increases
• When inputs increase by a factor of X and output increases by that
same amount
Long Run ATC – All resources variable,
none fixed • Economies of scale due to higher
production level allow
specialization among workers =>
per unit costs decreased => ATC
decreasing
• Constant Returns to scale => per
unit costs same => ATC constant
• Diseconomies of Scale due to
coordination problems that are
inherent in any large organziation
=> per unit costs increase => ATC
increasing
THANK YOU