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Cost Analysis in Short and Long Run

The document summarizes key concepts around short-run and long-run costs. In the short-run, a firm's capital is fixed while variable inputs like labor can be changed. In the long-run, all inputs including capital can be varied. It also discusses the relationships between total, average, and marginal costs. Total cost is the sum of total fixed and variable costs. Marginal cost is the change in total cost from a one-unit increase in output. Average costs are derived by dividing total costs by units of output. The shapes of cost curves are determined by the production technology and levels of diminishing or increasing returns.

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Raza Sami
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335 views16 pages

Cost Analysis in Short and Long Run

The document summarizes key concepts around short-run and long-run costs. In the short-run, a firm's capital is fixed while variable inputs like labor can be changed. In the long-run, all inputs including capital can be varied. It also discusses the relationships between total, average, and marginal costs. Total cost is the sum of total fixed and variable costs. Marginal cost is the change in total cost from a one-unit increase in output. Average costs are derived by dividing total costs by units of output. The shapes of cost curves are determined by the production technology and levels of diminishing or increasing returns.

Uploaded by

Raza Sami
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
  • Analysis of Costs Introduction
  • Short run and Long run
  • Economic Analysis of Costs
  • Definition of Marginal Cost
  • Cost Curves
  • Production and Costs
  • Diminishing Returns and U-Shaped Cost Curves
  • Economic Costs and Business Accounting
  • Income Statement

Analysis of Costs

Chapter 7
Samuelson, Nordhaus 18e

Short run and Long run

The Short Run


The short run is a time frame in which the quantity of one
or more resources used in production is fixed.
For most firms, the capital, called the firms plant, is fixed
in the short run.
Other resources used by the firm (such as labor, raw
materials, and energy) can be changed in the short run.
Short-run decisions are easily reversed.

Short run and Long run

The Long Run


The long run is a time frame in which the quantities of all
resourcesincluding the plant sizecan be varied.
Long-run decisions are not easily reversed.
A sunk cost is a cost incurred by the firm and cannot be
changed.
If a firms plant has no resale value, the amount paid for it is a
sunk cost.
Sunk costs are irrelevant to a firms current decisions.

Economic Analysis of Costs


To produce more output in the short run, the
firm must employ more labor, which means
that it must increase its costs.
We describe the way a firms costs change as
total product changes by using three cost
concepts and three types of cost curve:

Total cost
Marginal cost
Average cost

Economic Analysis of Costs


Total

Cost

A firms total cost (TC) is the cost of all resources


used.
Total fixed cost (TFC) is the cost of the firms
fixed inputs. Fixed costs do not change with output.
Total variable cost (TVC) is the cost of the firms
variable inputs. Variable costs do change with
output.
Total cost equals total fixed cost plus total variable
cost. That is:

TC = TFC + TVC

Economic Analysis of Costs


Figure shows a firms
total cost curves.
Total fixed cost is the same
at each output level.
Total variable cost increases
as output increases.
Total cost, which is the sum
of TFC and TVC also
increases as output
increases.

Definition of Marginal Cost


Marginal

Cost

Marginal cost (MC) is the increase in total


cost that results from a one-unit increase in
total product.
Over the output range with increasing marginal
returns, marginal cost falls as output increases.
Over the output range with diminishing
marginal returns, marginal cost rises as output
increases.

All Cost Curves Can be Derived


from the Total Cost
Average

Cost

Average cost measures can be derived from


each of the total cost measures:
Average fixed cost (AFC) is total fixed cost
per unit of output.
Average variable cost (AVC) is total variable
cost per unit of output.
Average total cost (ATC) is total cost per unit
of output.

ATC = AFC + AVC.

Chapter 7
Figure 7-2

All Cost Curves Can Be Derived


from the Total Cost Curve

The Link Between Production


and Costs

The shapes of a firms cost curves are determined


by the technology it uses:

MC is at its minimum at the same output level at which


marginal product is at its maximum.
When marginal product is rising, marginal cost is falling.
AVC is at its minimum at the same output level at which
average product is at its maximum.
When average product is rising, average variable cost is
falling.

Chapter 7
Table 7-4

Costs are Derived from


Production Data and Input
Costs

Chapter 7
Figure 7-4a

Diminishing Returns and


U-Shaped Cost Curves

Chapter 7
Figure 7-4b

Diminishing Returns and


U-Shaped Cost Curves

Economic Costs and Business


Accounting
The

Income Statement measures the flows


into and out of the firm, while the balance
sheet measures the stocks of assets and
liabilities at the end of the accounting
year.

Chapter 7
Table 7-5

Income Statement

Read Chapter 8

Analysis of Costs Analysis of Costs Chapter 7 Chapter 7 Samuelson, Nordhaus 18e Samuelson, Nordhaus 18e
Short run and Long run Short run and Long run ►The Short Run The Short Run The The short run short run is a time frame in w
Short run and Long run Short run and Long run ►The Long Run The Long Run The The long run long run is a time frame in which
Economic Analysis of Costs Economic Analysis of Costs To produce more output in the short run, the To produce more outp
►Total Cost Total Cost A firm’s A firm’s total cost total cost (TC) (TC) is the cost of is the cost of all all resou
Figure shows a firm’s Figure shows a firm’s total cost curves. total cost curves. Total fixed cost is the same Total
►Marginal Cost Marginal Cost Marginal cost Marginal cost (MC) (MC) is the increase in total is the increase in total
►Average Cost Average Cost Average cost measures can be derived from Average cost measures can be derived from each of
All Cost Curves Can Be Derived All Cost Curves Can Be Derived from the Total Cost Curve from the Total Cost Curve Chapter 7
►The shapes of a firm’s cost curves are determined The shapes of a firm’s cost curves are determined by the technology

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