Short run costs SFLS

1. Production and Costs
Short run costs

2. Define:
costs

3. Accountant vs. Economist

4. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs

5. Defining Total Costs
Explicit Costs
(accounting costs)
-Cost paid is cash.
( just the money itself )

6. Defining Total Costs
Explicit Costs
(accounting costs)
-Cost paid is cash.
( just the money itself )
Implicit Costs
(opportunity costs)
- The opportunity costs where
real money is not exchanged.
-Also the cost of factors of
production that change where
no real money is exchanged.
( example – Depreciation )
- Also includes a normal profit

7. Defining Total Costs
Explicit Costs
(accounting costs)
-Cost paid is cash.
( just the money itself )
Implicit Costs
(opportunity costs)
- The opportunity costs where
real money is not exchanged.
-Also the cost of factors of
production that change where
no real money is exchanged.
( example – Depreciation )
- Also includes a normal profit
Normal Profit – willNormal Profit – will
be a significantbe a significant
issue for later toissue for later to
understandunderstand

8. Explicit vs. Implicit Costs: An Example
You need 100,000 to start your business.
The interest rate is 5%.
Case 1: borrow 100,000
explicit cost = $5000 interest on loan
Case 2: use $40,000 of your savings,
borrow the other $60,000
explicit cost = $3000 (5%) interest on the loan
implicit cost = $2000 (5%) foregone interest you could have earned on
your $40,000.

9. Explicit vs. Implicit Costs: An Example
You need 100,000 to start your business.
The interest rate is 5%.
Case 1: borrow 100,000
explicit cost = $5000 interest on loan
Case 2: use $40,000 of your savings,
borrow the other $60,000
explicit cost = $3000 (5%) interest on the loan
implicit cost = $2000 (5%) foregone interest you could have earned on
your $40,000.
In both cases, total (explicit + implicit) costs are
$5000.

10. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs
1.)Depreciation

11. Defining Total Costs
Implicit Costs
Depreciation - Things lose value over time,
an old machine is not worth
as much as a new one.
- It is an implicit cost

12. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs
1.)DepreciationEconomic Profit
2.) Normal Profit
Accountant Profit

13. Defining Profit
Accountant Profit
- (TR) total revenue minus (explicit cost + depreciation)

14. Defining Profit
Accountant Profit
Economic Profit
- A firm’s (TR) total revenue minus total costs
( Explicit + Implicit)

15. Defining Profit
Accountant Profit
Normal Profit -The opportunity cost of doing
something else with the factors
of production.
-The returns of entrepreneurship
-In graphs later this will equal
zero (0), which will equal
MR= MC
Economic Profit

16. Defining Profit
Accountant Profit
Normal Profit -The opportunity cost of doing
something else with the factors
of production.
-The returns of entrepreneurship
-In graphs later this will equal
zero (0), which will equal
MR= MC
Economic Profit
Normal Profit – isNormal Profit – is
considered a costconsidered a cost
for an economist, itfor an economist, it
is the opportunityis the opportunity
cost of timecost of time

17. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs
1.)DepreciationEconomic Profit
2.) Normal Profit
Accountant Profit

18. Two Views of Total Costs
(Explicit costs + all Implicit costs
= Total Costs)
The Accounting View:
(Explicit Costs + depreciation
= Total Costs)
The Economic View: It is not just the money but also the
opportunity costs.
Add up all your costs and add up all your
revenue but also include your opportunity
costs or doing something else instead.
It is only about the money,
add up your costs and up your revenue
and ask did you make money?
Two views on what costs are:

19. The Accounting View of Total Costs:
b.) Add up you explicit costs. - Explicit costs is the actual
money.
c.) Add up your depreciation. - Depreciation is the
degradation of capital.
a.) Add up all your profit.
If it’s positive you made
money
If it’s negative you lost
money
d.) Add B and C together a
minus it from A
a – (b + c) = economic profit
(accountant profit)
- Your total revenue
earned

20. Do the exact same thing as an accountant would do
But don’t forget your opportunity cost of doing something else.
b.) Add up you explicit costs
c.) Add up all of your implicit costs
a.) Add up all your profit
- Depreciation + Normal Profit
The Economists View of Total Costs:
- All the actual money
- Your total revenue
If it’s positive you made money
If it’s negative you lost money
If it’s zero you made a normal
profit
d.) Add B and C together a
minus it from A
a – (b + c) = economic profit

21. Economists vs. Accountants

22. Economists vs. Accountants
Total
costs

23. Economists vs. Accountants
Total
costs
Total
costs

24. Economists vs. Accountants
Total
costs
Total
costs

25. The equilibrium rent on office space has just increased by
$500/month.
Compare the effects on accounting profit and economic
profit if
a. you rent your office space
b. you own your office space
Economic profit vs. Accounting profit
Example:

26. The rent on office space increases $500/month.
a.You rent your office space.
Explicit costs increase $500/month.
Accounting profit & economic profit each fall
$500/month.
Answers
26
Example:

27. The rent on office space increases $500/month.
b. You own your office space.
Explicit costs do not change,
so accounting profit does not change.
Implicit costs increase $500/month (opp. cost
of using your space instead of renting it),
so economic profit falls by $500/month.
Answers
27
Example:

28. The rent on office space increases $500/month.
b. You own your office space.
Explicit costs do not change,
so accounting profit does not change.
Implicit costs increase $500/month (opp. cost
of using your space instead of renting it),
so economic profit falls by $500/month.
Answers
28
Example:
What if the rent increased by 1 million? IfWhat if the rent increased by 1 million? If
you keep your business there, then youyou keep your business there, then you
lose the opportunity to earn that, youlose the opportunity to earn that, you
could rent it out and move your businesscould rent it out and move your business
to a cheaper officeto a cheaper office

29. In 2012, Toni taught music and earned 32,000RMB. She also earned
14,000RMB by renting out her basement. On January 1, 2013, she quit
teaching, stopped renting out her basement, and began to use it as the
office for her new Website business. She took 2,000RMB from her
savings account to buy a computer. During 2013, she paid 1,500RMB
for the lease of a Web server and 1,750RMB for high-speed internet
service. She received a total revenue from website designing of
45,000RMB and earned interest at 5% a year on her savings account.
At the end of 2013, Toni could have sold her computer for 500RMB.
a. Calculate Toni’s explicit costs and implicit costs in 2013.
b. Calculate Toni’s economic profit in 2013.
Another Example:

30. a. Explicit costs are the $1,500 for the lease of a Web server and
$1,750 for high speed Internet service. The total explicit costs are‐
$3,250.
The implicit costs are the $32,000 in wages forgone, the $14,000 in
rent forgone, the $100 in forgone interest payments on the
savings, and the $1,500 in economic depreciation for the
computer.
The total implicit costs are $47,600.
b. The economic profit equals total revenue minus total
opportunity costs, which is $45,000 − ($3,250 + $47,600) = −
$5,850.
Toni incurred an economic loss of $5,850 for the year.
Answers
Example:

31. Short Run
Long Run
Types of Costs Through Time

32. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs
1.)DepreciationEconomic Profit
2.) Normal Profit
Accountant Profit
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable

33. Factory
An example of someAn example of some
business costsbusiness costs
Let’s say you are the ownerLet’s say you are the owner
of a factoryof a factory

34. Factory
I want a
bigger
factory
today

35. Factory
I want a
bigger
factory
today

36. Factory
I want a
bigger
factory
today
So you want to “grow”So you want to “grow”
your factoryyour factory

37. Factory
I want a
bigger
factory
today

38. Factory
In the short run
some costs are
fixed – they
can’t be
changed

39. Short Run
- Input quantity is fixed for a period of time
and cannot be varied. ( include sunk costs)
Types of Costs Through Time
Ex. You can’t change technology and
capital that quickly.
1.) Fixed costs
K – capital

40. Factory Workers
Now for example, let’sNow for example, let’s
look at the workers inlook at the workers in
your factoryyour factory

41. Factory Workers
I want more
workers!

42. Factory Workers
I want more
workers!
加 加 加 加
加
加
加
加

43. Your Fired!
Factory Workers

44. Your Fired!
Factory Workers

45. Short Run
- Input quantity is fixed for a period of time
and cannot be varied. ( include sunk costs)
Types of Costs Through Time
Ex. You can’t change technology and
capital that quickly.
1.) Fixed costs
K – capital
2.) Variable costs
L - labor
- Input whose quantity the firm can
vary at any time.
Ex. Labor can change, you can fire or
hire workers.
You can add workers and removeYou can add workers and remove
workers anytime, but you can’t justworkers anytime, but you can’t just
make your factory bigger or smaller atmake your factory bigger or smaller at
anytime.anytime.

46. Like a Boss!
Factory Workers
Fixed Costs Variable Costs

47. Short Run
Long Run
- Input quantity is fixed for a period of time
and cannot be varied. ( include sunk costs)
Types of Costs Through Time
Ex. You can’t change technology and
capital that quickly.
1.) Fixed costs
K – capital
2.) Variable costs
L - labor
- Input whose quantity the firm can
vary at any time.
Ex. Labor can change, you can fire or
hire workers.
- All inputs can be varied.
- What matters is the scale
1.) Everything is
variable!

48. -To produce more output in the short run, a firm employs more
labor, which means the firm must increase its costs.
Short Run Costs
(TC) Total Cost
(MC) Marginal Cost
(AC) Average Cost

49. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs
1.)DepreciationEconomic Profit
2.) Normal Profit
Accountant Profit
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
(MC) Marginal Cost
(AC) Average Cost

50. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs
1.)DepreciationEconomic Profit
2.) Normal Profit
Accountant Profit
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
1.) TFC) Total Fixed cost
2.) (TVC) Total Variable cost
(MC) Marginal Cost
(AC) Average Cost
1.) (ATC) Average Total cost
2.) (AFC) Average Fixed cost
3.) (AVC) Average Variable cost

51. (TC) Total Cost - is the cost of all the
factors of production the
firm uses.
(TFC) Total Fixed Cost - cost of land, capital, and
entrepreneurship.
-total fixed cost doesn’t
change as output changes
Short Run Costs

52. What is the
(TFC) Total
Fixed Cost?

53. What is the
(TFC) Total
Fixed Cost?
= 10
The cost you
will have no
matter what
the output is

54. Total fixed
cost (TFC)
is constant
it graphs as
a horizontal
line.

55. (TC) Total Cost
(TFC) Total Fixed Cost
Short Run Costs
(TVC) Total Variable Cost - cost of labor.
- To change its output in the
short run, a firm must
change the quantity of labor
it employs, so total variable
cost changes as output
changes.

56. 1.) What is the (TVC) total variable
costs at an output of 1?
2.) What is the (TVC) total variable
costs at an output of 3?
3.) What is the (TVC) total variable
costs at an output of 6?

57. 1.) What is the (TVC) total variable
costs at an output of 1?
2.) What is the (TVC) total variable
costs at an output of 3?
3.) What is the (TVC) total variable
costs at an output of 6?
6
12
18

59. Total cost (TC)
also increases as
output increases.
Total variable
cost (TVC)
increases as
output increases.

60. (TC) Total Cost
(TFC) Total Fixed Cost
(TVC) Total Variable
Cost
+
=

61. (MC) Marginal Cost
Short Run Costs
- is the change in total cost
that results from a one-
unit increase in total
product.
- Marginal cost tells us how
total cost changes as total
product changes.
(TC) Total Cost
______________TCTC
QQ
______________- Total cost
- Quantity of output

63. (AC) Average Cost - is (TC) per unit of
output.
(AFC) Average
Fixed Cost
is (TFC) per unit of output.
Short Run Costs
(TC) Total Cost
(MC) Marginal Cost
__________TFCTFC
QQ
__________________- Fixed cost
- Quantity of output

65. Average fixed cost
(AFC) decreases as
output increases.

66. Short Run Costs
(TC) Total Cost
(AVC) Average
Variable Cost
is (TVC) per unit of output.
- is (TC) per unit of
output.
(AFC) Average
Fixed Cost
is (TFC) per unit of output.
(MC) Marginal Cost
(AC) Average Cost

67. Short Run Costs
(TC) Total Cost
(AVC) Average
Variable Cost
is (TVC) per unit of output.
- is (TC) per unit of
output.
(AFC) Average Fixed Cost is (TFC) per unit of output.
(MC) Marginal Cost
(AC) Average Cost
__________TVCTVC
QQ
__________________- Total Fixed cost
- Quantity of output

69. Average fixed cost
(AFC) decreases as
output increases.
The average variable
cost curve (AVC) is U-
shaped.

71. (AC) Average Cost
(AFC) Average Fixed
Cost
(AVC) Average
Variable Cost
+
=

72. (MC) Marginal Cost
MC =
Q
TC
- is the change in total cost that
results from a one-unit increase in
total product.
- Marginal cost tells us how total
cost changes as total product
changes.

73. The (MC) marginal
cost curve is U-
shaped and intersects
the (AVC) average
variable cost curve
and the (ATC)
average total cost
curve at their
minimum points.

74. Short Run Costs
Why the (ATC) Average Total Cost Curve Is U-Shaped
The U shape of the average total cost curve arises
from the influence of two opposing forces:
1.) Spreading total fixed cost over a larger output
2.) Decreasing marginal returns (DMR)

75. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs
1.)DepreciationEconomic Profit
2.) Normal Profit
Accountant Profit
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
1.) TFC) Total Fixed cost
2.) (TVC) Total Variable cost
(MC) Marginal Cost
(AC) Average Cost
1.) (ATC) Average Total cost
2.) (AFC) Average Fixed cost
3.) (AVC) Average Variable cost

76. Linking the
Cost Curves and Product Curves

77. A firm’s marginal cost curve is linked
to its marginal product curve.
If marginal product rises,
marginal cost falls.
If marginal product is a maximum,
marginal cost is a minimum.

78. A firm’s average variable cost
curve is linked to its average
product curve.
If (AP) average product rises,
(AVC) average variable cost falls.
If (AP) average product is a
maximum, (AVC) average
variable cost is a minimum.

79. A firm’s average variable cost
curve is linked to its average
product curve.
If (AP) average product rises,
(AVC) average variable cost falls.
If (AP) average product is a
maximum, (AVC) average
variable cost is a minimum.
They are a mirror oppositeThey are a mirror opposite
of each other. So theof each other. So the
maximum and minimummaximum and minimum
points are at the samepoints are at the same
output points.output points.

80. Workers
MCAPMP
Then, at the point of maximum marginal product, marginal cost is a
minimum.
Highest MP Lowest MC
As the firm hires more labor, marginal product decreases and
marginal cost increases.
Workers
At low levels of employment and output, as the firm hires
more labor, marginal product and average product rise,
and marginal cost and average variable cost fall.
Cost Curves and Product Curves
AVC
MP AP MC AVC

81. (MPL)=1
好
工
人
(MPL)=2
好
工
人
(MPL)=4
好
工
人
(MPL)=3
好
工
人
(MPL)=1
不
好
工
人
(MPL)=0
白痴
工人
(MPL)=-1
愚蠢白
痴工人
Decreasing Marginal
Returns (DMR)
Negative
M - Returns
Increasing
Marginal Returns

82. (MPL)=1
好
工
人
(MPL)=2
好
工
人
(MPL)=4
好
工
人
(MPL)=3
好
工
人
(MPL)=1
不
好
工
人
(MPL)=0
白痴
工人
(MPL)=-1
愚蠢白
痴工人
Decreasing Marginal
Returns (DMR)
Negative
M - Returns
(AVC) Average variable
costs are decreasing
(AVC) Average variable
costs are increasing
Each worker costs less
since each one is producing
more
Each worker costs more
since each one is producing
less
Increasing
Marginal Returns

83. (MPL)=1
好
工
人
(MPL)=2
好
工
人
(MPL)=4
好
工
人
(MPL)=3
好
工
人
(MPL)=1
不
好
工
人
(MPL)=0
白痴
工人
(MPL)=-1
愚蠢白
痴工人
Negative
ReturnsMP AP MP AP

84. (MPL)=1
好
工
人
(MPL)=2
好
工
人
(MPL)=4
好
工
人
(MPL)=3
好
工
人
(MPL)=1
不
好
工
人
(MPL)=0
白痴
工人
(MPL)=-1
愚蠢白
痴工人
Negative
ReturnsMP AP
MC AVC
MP AP
MC AVC

85. AP
But also as average product continues to rises, and average
variable cost continues to fall.
Cost Curves and Product Curves
Then, at the point of maximum average product, average variable
cost is a minimum.
Highest AP Lowest AVC
As the firm hires even more labor, average product decreases
and average variable cost increases.
WHILE AVC
Workers AP AVCTHEN

86. At small outputs,
MP and AP rise
MC and AVC fall.
At intermediate outputs,
MP falls and MC rises
AP rises and AVC falls.
At large outputs,
MP and AP fall
MC and AVC rise.

87. A firm’s average variable cost
curve is linked to its average
product curve.
If (AP) average product rises,
(AVC) average variable cost falls.
If (AP) average product is a
maximum, (AVC) average
variable cost is a minimum.

88. Short Run Cost Curves Shifts
Technology
In the short run these curves have twoIn the short run these curves have two
reasons why they shift.reasons why they shift.
Prices of Factors of Production

89. Technology
A technological change that increases productivity
shifts the total product curve upward. It also shifts
the marginal product curve and the average
product curve upward.
With a better technology, the same inputs can
produce more output, so an advance in technology
lowers the average and marginal costs and shifts
the short-run cost curves downward.
Short Run Cost Curves Shifts

91. Things sure have changed, and becomeThings sure have changed, and become
cheaper for people and more people havecheaper for people and more people have
access to some pretty cool things.access to some pretty cool things.

92. Technology
Shift upwardsShift upwards
Short Run Cost Curves Shifts
increasedincreased
productivityproductivity
APMPTP
MC ACTC
Typically shifts downwardsTypically shifts downwards

93. Short Run Cost Curves Shifts
Prices of Factors of Production
An increase in the price of a factor of productionAn increase in the price of a factor of production
increases costs and shifts the cost curves.increases costs and shifts the cost curves.
But how the curves shift depends on which resourceBut how the curves shift depends on which resource
price changesprice changes..

94. So is it fixed costs thatSo is it fixed costs that
change?change?

95. Or is it variable costs thatOr is it variable costs that
change?change?

96. Short Run Cost Curves Shifts
Prices of Factors of Production
An increase in rent or another component of fixed cost
Shifts the fixed cost curves (TFC and AFC)
Shifts the total cost curve (TC and ATC)
Leaves the variable cost curves (AVC and TVC) and the
marginal cost curve (MC) unchanged.

97. Factory
Workers
Variable cost Fixed cost
$100
Fixed cost change example –Fixed cost change example –
you own the factory but not theyou own the factory but not the
land, you have to rent it from aland, you have to rent it from a
landlordlandlord
You pay

98. Factory
Workers
Pay me more
Rent!
Variable cost Fixed cost
$100 $1000
Now you pay

99. Short Run Cost Curves Shifts
Prices of Factors of Production
An increase in rent or another component of fixed cost
Shifts the fixed cost curves (TFC and AFC)
Shifts the total cost curve (TC and ATC)
Leaves the variable cost curves (AVC and TVC) and the
marginal cost curve (MC) unchanged.

100. Short Run Cost Curves Shifts
Prices of Factors of Production
An increase in the wage rate or another component of variable cost
Shifts the variable curves (TVC and AVC)
Shifts the marginal cost curve (MC)
Shifts the total cost curve (TC and ATC)
Leaves the fixed cost curves (AFC and TFC) unchanged.

101. Factory
Workers
Variable cost
Fixed cost
$20 for each
strike
Not
fair
Variable cost change exampleVariable cost change example
– the workers strike to get– the workers strike to get
more moneymore money

102. Factory
Workers
More Pay!
Variable cost
Fixed cost
$20 for each
$40 for each
strike
Not
fair

103. Short Run Cost Curves Shifts
Prices of Factors of Production
An increase in the wage rate or another component of variable cost
Shifts the variable curves (TVC and AVC)
Shifts the marginal cost curve (MC)
Shifts the total cost curve (TC and ATC)
Leaves the fixed cost curves (AFC and TFC) unchanged.

104. Short Run
Long Run
- Input quantity is fixed for a period of time
and cannot be varied. ( include sunk costs)
Types of Costs Through Time
Ex. You can’t change technology and
capital that quickly.
1.) Fixed costs
K – capital
2.) Variable costs
L - labor
- Input whose quantity the firm can
vary at any time.
Ex. Labor can change, you can fire or
hire workers.
- All inputs can be varied.
- What matters is the scale
1.) Everything is
variable!

105. Profit = Total revenue – Total cost
Costs summary:__________________________
Goods and Services produced
Time
Production summary:____________________
(TP) Total Product
(MP) Marginal Product
(AP) Average Product
(MP or MPL) Marginal Product of Labor
(DMR) Decreasing Marginal Returns
Explicit Costs Implicit Costs
1.)DepreciationEconomic Profit
2.) Normal Profit
Accountant Profit
Short Run
1.)Fixed Costs
2.)Variable Costs
Long Run
1.) All Variable
(TC) Total Cost
1.) TFC) Total Fixed cost
2.) (TVC) Total Variable cost
(MC) Marginal Cost
(AC) Average Cost
1.) (ATC) Average Total cost
2.) (AFC) Average Fixed cost
3.) (AVC) Average Variable cost
That’s it for now for short run costs, a lotThat’s it for now for short run costs, a lot
of kinds, hope you enjoyed it! Thanksof kinds, hope you enjoyed it! Thanks
