Short-run Cost functions

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Marginal cost - when do diminishing returns set in?
Average cost and intersection with marginal cost
Total cost and its shape


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Microeconomics: Short-Run Cost functions : Microeconomics: Short-Run Cost functions UK Stream A2 Level economics 3.2.2c US stream Advanced Placement microeconomics Iic 3 1

Learning outcomes : Learning outcomes 2 Learning outcome Slide numbers Moving from modelling production in the short-term to modelling cost 3 Shape of short-run marginal cost curve and average cost curve 4 -5 Total costs, marginal cost and average cost – how are they related? 6-7 Our journey from production to costs to revenue to profits maximisation 8 MCQs - over to you! 9-11

Costs of production : Costs of production Fixed costs Capital costs such as depreciation on machines (ovens) – incurred whether used or not Salaries of staff on fixed contracts e.g. year-long – paid regardless of output Rent on premises (costs lf land) – paid to landlord regardless of production Variable costs Mostly labour costs Cost of labour without fixed contracts Costs of over-time Costs of labour paid per ‘price’ 3

From marginal product to marginal cost : From marginal product to marginal cost Production function Cost function 4 1 2 3 4 5 6 7 8 9 10 Marginal cost Average cost AC M C Diminishing marginal returns set in Diminishing marginal returns set in MC, AC Variable factor MP, AP Variable factor

From marginal cost to total cost : From marginal cost to total cost Total cost Marginal and average cost 5 MC, AC Output Output MC A C TC2 TC1 TC3 TC TC1 Fixed costs

Marginal/average cost and total costs : Marginal/average cost and total costs 6 Marginal and average cost MC, AC Output TC O utput TC M C AC A A B B MC = ∆TC/ ∆Q AC = TC/Q

Where next? : Where next? 7

And now it’s your turn : And now it’s your turn 8

Yusuf Ashworth
Experienced teacher of micro- and macro-economics
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