The Supply Decision Short-run Costs • Short-run and long-run changes in production – fixed and variable factors of production – the short run – the long run • Production in the short run – the law of diminishing returns • When one of more factors are held fixed, there will come a point beyond which the extra output from additional units of the variable factor will diminish Short-run Costs • Measuring costs of production – opportunity cost • explicit costs • implicit costs – irrelevance of sunk costs (historic costs) • Costs and inputs – costs and the productivity of factors of production – costs and the price of factors of production – fixed and variable costs Short-run Costs • Total cost – total fixed cost (TFC) Total costs for firm X Output TFC (Q) (£) 100 80 60 12 12 12 12 12 12 12 12 40 20 0 Total costs for firm X Output TFC (Q) (£) 100 80 60 12 12 12 12 12 12 12 12 40 20 TFC 0 Short-run Costs • Total cost – total fixed cost (TFC) – total variable cost (TVC) Short-run Costs • Total cost – total fixed cost (TFC) – total variable cost (TVC) • TVC and the law of diminishing returns Total costs for firm X Output TFC (Q) (£) 100 80 60 12 12 12 12 12 12 12 12 40 20 TFC 0 Total costs for firm X Output TFC TVC (Q) (£) (£) 100 80 60 10 16 21 28 40 60 91 12 12 12 12 12 12 12 12 40 20 TFC 0 Finding maximum profit using total curves TC 24 b TR, TC, T (£) 20 16 TR a 12 c d -4 -8 T Quantity TR, TC, T (£) Finding maximum profit using total curves 24 22 20 18 16 14 12 10 -2 -4 -6 -8 TC d TR e f T Quantity Profit Maximisation • Using total curves – maximising the difference between TR and TC – the total profit curve • Using marginal and average curves – stage 1: profit maximised where MR = MC Finding the profit-maximising output using marginal curves 16 Costs and revenue (£) 12 -4 Quantity Finding the profit-maximising output using marginal curves 16 MC Costs and revenue (£) 12 -4 Quantity Finding the profit-maximising output using marginal curves 16 MC Costs and revenue (£) 12 Profit-maximising output e -4 MR Quantity Profit Maximisation • Using total curves – maximising the difference between TR and TC – the total profit curve • Using marginal and average curves – stage 1: profit maximised where MR = MC – stage 2: using AR and AC curves to measure maximum profit Measuring the maximum profit using average curves 16 MC Costs and revenue (£) 12 -4 MR Quantity Measuring the maximum profit using average curves 16 MC Costs and revenue (£) 12 AR -4 MR Quantity Measuring the maximum profit using average curves 16 MC Total profit = £1.50 x = £4.50 Costs and revenue (£) 12 AC a 6.00 TOTAL PROFIT b 4.50 AR -4 MR Quantity Profit Maximisation • Some qualifications – long-run profit maximisation – the meaning of “profit” – loss minimising: still produce where MR = MC Loss-minimising output MC Costs and revenue (£) AC AC LOSS AR AR O Q MR Quantity Profit Maximisation • Some qualifications – long-run profit maximisation – the meaning of “profit” – loss minimising: still produce where MR = MC – short-run shut-down point: P = AVC Costs and revenue (£) The short-run shut-down point AC AVC P= AVC AR O Q Quantity Profit Maximisation • Some qualifications – long-run profit maximisation – the meaning of “profit” – loss minimising: still produce where MR = MC – short-run shut-down point: P = AVC – long-run shut-down point: P = LRAC