short-run costs and output decisions

short-run costs and output decisions

In the short run, all firms have costs that they must bear regardless of their output. Fixed cost: any cost that does not depend on the firm's level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.

Variable costs: a cost that depends on the level of production chosen

Total cost=fixed costs+variable costs
Total fixed cost/overhead: The total of all costs that do not change with output, even if output is zero.
Firms have no control over fixed costs in the short run. For this reason, fixed costs are sometimes called sunk costs.

Average fixed cost: total fixed cost/ number of units of output
So sunk cost is constant while average fixed cost can decline as more outputs are produced. This is called spreading overhead


Total variable cost: the total of all costs that vary with output in the short run.
It depends on (1)the techniques of production that are available (2)the prices of the inputs required by each technology. To produce more products, a firm uses more inputs. The cost of additional output depends directly on the additional inputs that are required and how much they cost.

Marginal costs reflect changes in variable costs because they vary when output changes. Fixed costs do not change when output changes.

Marginal cost is the cost of the added inputs, or resources, needed to produce one additional unit of output. In the short run, marginal cost eventually rises with output. (Diminishing returns set in)
Diminishing returns (decreasing marginal product) implies that increasing marginal cost.

IN she short run, every firm is constrained by some fixed input that (1)leads to diminishing returns to variable inputs and (2)limits its capacity to produce. As a firm approaches that capacity, it becomes increasingly costly to produce successively higher levels of output. Marginal costs ultimately increase with output in the short run.


Different types of costs:
1. accounting cost:  Out-of-pocket costs or costs as an accountant would define them. Sometimes referred to as explicit costs.
2. economic costs( accounting cost+ normal rate of return+ opp cost of factors in the production process ): Costs that include the full opp costs of all inputs. Implicit costs.
3. sunk cost/ fixed cost
4. total variable cost: cost that vary with the level of output.
5. marginal cost: the increase in total cost that results from producing one additional unit of output.