ECON1001 · Introductory Microeconomics
Production & Costs
Week 3 turns inputs into costs. The production function q = f(L) gives the most output for given inputs; in the short run at least one input is fixed (so marginal product diminishes), while in the long run everything is variable. Costs decompose as TC = FC + VC, and from them come the per-unit curves: AFC (always falling), AVC and the U-shaped ATC, plus MC. The keystone rule is that MC cuts AVC and ATC at their minimums. In the long run the LRAC is the lower envelope of short-run curves and reveals economies of scale.
What this chapter covers
- 01Production function q = f(L); analogy to a PPF
- 02Short run (an input fixed) vs long run (all variable) defined by flexibility, not time
- 03Marginal product and diminishing marginal product
- 04Returns to scale: constant, increasing, decreasing
- 05Economic vs accounting profit (implicit costs included)
- 06TC = FC + VC; MC = ΔTC
- 07AFC, AVC, ATC = AFC + AVC and the U-shape
- 08MC through the minimum of AVC and ATC; the LRAC envelope and economies of scale
Cost-curve arithmetic from a total cost function
- 2 marks · FC and VC splitThe constant term is fixed cost: FC = 12. The rest is variable cost: VC = 4q + q².
- 2 marks · AFC and AVCAFC = FC/q = 12/6 = 2. AVC = VC/q = (4q + q²)/q = 4 + q = 10 at q = 6.
- 2 marks · ATCATC = AFC + AVC = 2 + 10 = 12 (check: TC at q = 6 is 12 + 24 + 36 = 72, and 72/6 = 12).
- 2 marks · MC and the rising/falling judgementMC = dTC/dq = 4 + 2q = 16 at q = 6. Since MC (16) > ATC (12), ATC is rising at q = 6.
Key terms
- Marginal product (MP)
- The extra output from one more unit of a variable input; it equals the slope of the production function and diminishes in the short run because a fixed input becomes a bottleneck.
- Returns to scale
- How output responds when all inputs are scaled proportionally in the long run: constant, increasing or decreasing returns.
- Economic profit
- Revenue minus all costs including implicit opportunity costs, so it is lower than accounting profit, which counts only explicit costs.
- Marginal cost (MC)
- The change in total cost from producing one more unit; it passes through the minimum of both AVC and ATC from below.
- Average total cost (ATC)
- Total cost per unit, equal to AFC + AVC; U-shaped because falling AFC dominates at low output and rising MC dominates later.
- Long-run average cost (LRAC)
- The lower envelope of all short-run average cost curves; its slope reveals economies of scale (falling), diseconomies (rising) or constant returns (flat).
Production & Costs FAQ
What distinguishes the short run from the long run?
Flexibility, not calendar time. In the short run at least one input (often capital) is fixed; in the long run every input can be adjusted. A 'long run' could be days for a market stall or years for a power plant.
Why is the ATC curve U-shaped?
At low output, spreading fixed cost over more units pulls average cost down (AFC falls fast). Eventually diminishing marginal product pushes marginal and variable cost up faster than AFC falls, so ATC turns and rises — giving the U.
Why must MC pass through the minimum of AVC and ATC?
An average falls while the marginal value is below it and rises while it is above it, so the average can only be flat — at its minimum — where marginal equals average. That logic forces MC through both minima from below.
Exam move
Get fluent at extracting FC, VC, the four average curves and MC from any TC function, and always cross-check ATC by computing TC/q directly. Memorise the geometry as a set of true/false rules: AFC always falls, MC cuts AVC and ATC at their minima, MC above average means average rising. For long-run questions, draw the envelope and label the falling, flat and rising regions as economies, constant and diseconomies of scale — the diagram makes the multiple-choice answer obvious.
