CB2400 Chap.9 Short-run Production and Costs
Short-run Production and Costs
One input remains fixed
The short run is an adjustment condition, not a fixed calendar period. At least one input cannot change. Total fixed cost therefore remains constant with output, total variable cost changes with production, and total cost equals their sum.
Average fixed cost falls as unchanged fixed cost is spread over more units.
Productivity drives variable cost
With a constant wage, average variable cost equals the wage divided by average product of labour, while marginal cost equals the wage divided by marginal product. Rising marginal product lowers marginal cost.
Once diminishing marginal returns makes marginal product fall, producing the next unit requires more labour and marginal cost rises.
Marginal values pull averages
When marginal cost lies below an average cost, it pulls that average down; when it lies above, the average rises. MC therefore crosses AVC and ATC at their respective minimum points.
A fixed-cost increase raises TFC, TC, AFC and ATC but leaves TVC, AVC and MC unchanged. A variable input-price increase shifts the variable and marginal cost measures.
What this chapter covers
- 01
short-run inputs
- 02
total product
- 03
diminishing marginal returns
- 04
fixed and variable costs
- 05
average costs
- 06
marginal cost
Worked example · free
Convert marginal product into marginal cost
- 2Calculate the sixth worker's marginal product.
- 3Divide the additional labour cost by additional output.
- 3Combine variable and fixed costs at six workers.
Key terms
- Total Fixed Cost
- Cost that does not vary with output over the short-run range.
- Variable Cost
- Cost that changes as the firm adjusts variable inputs and output.
- Marginal Product
- The extra output contributed by an additional unit of a variable input.
- Marginal Cost
- The additional total cost caused by an increase in output.
- Average Total Cost
- Total cost divided by the number of output units produced.
Short-run Production and Costs FAQ
Does diminishing marginal returns mean output falls?
No. Diminishing marginal returns begins when successive units of the variable input add less output than the previous unit. Total product can continue rising while marginal product is positive. Total output falls only if marginal product becomes negative, which is a later and distinct condition.
Why does MC cross an average at its minimum?
A marginal value below the existing average pulls the next average down, while a marginal value above it pushes the average up. The direction switches where marginal and average meet. MC crosses AVC and ATC at different quantities because fixed cost enters ATC but not AVC.
Which curves move after a fixed-cost increase?
TFC and TC rise by the added fixed amount, while AFC and ATC rise because their numerators include fixed cost. TVC and AVC stay put. MC also remains unchanged because the additional cost of producing the next unit has not changed.
Exam move
Rebuild the chain from a small table: labour to total product, changes in total product to marginal product, labour cost to variable cost, and cost changes to marginal cost. Before moving a graph, classify a shock as fixed or variable. Use the marginal-average rule as an audit instead of memorising curve crossings without explanation. Write the identities TC = TFC + TVC and ATC = AFC + AVC above the table.
Each row should satisfy both. Calculate MP as the change in total product when labour increases, then use a constant wage to verify MC = w/MPL. A fall in positive marginal product means total product still grows but at a slower rate; it does not mean output has fallen. On the graph, check that MC cuts AVC and ATC at their minimum points and that the ATC-AVC gap narrows as AFC declines.
Shock drills should begin by asking whether the affected payment changes with output. A higher fixed rental raises TFC, TC, AFC and ATC without moving MC or AVC. A higher variable wage raises variable and marginal measures. For interval data, divide the cost change by the output change and label the result as an arc marginal cost. Finish by explaining one curve movement causally through productivity or the relevant numerator.
Hide one table column and reconstruct it from the identities, which exposes whether each formula is understood well enough to work in both directions.
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