The Short Run

MC, ATC, AVC Graph

x-axis = Costs x-axis = Output

TFC Graph

x-axis = Costs x-axis = Output Horizontal line, y = total price of fixed factors

Total Fixed Costs (TVC)

Fixed costs remain the same no matter how much is produced (rent, repayment of loans, maintenance and insurance). TFC = number of fixed factors x price per factor = F X C = k (constant)

Increasing Output

If a firm wishes to increase output, they may only do so by applying more units of the variable factors to the fixed factors.

Gap Between ATC and AVC

The gap between the average total cost and the average variable cost curve is average fixed costs, which is why the gap gets smaller as output increases.

The Law of Diminishing Returns

The hypothesis of eventually diminishing average returns: As extra units of a variable factor are added to a given quantity of a fixed factor, the output per unit of the variable factor will eventually diminish. (AP curve).

Length of Short Run

The length of the short run will be determined by the time it takes to increase the quantity of the fixed factor. (It will vary from industry to industry).

Capacity Output

The minimum point of the ATC curve. It is the most efficient point of output. Producing beyond the capacity is inefficient.

The Short Run

The short run is that period of time in which at least one factor of production is fixed. All production takes place in the short run (applying more of the variable factors (labour for example) to the fixed factor (capital, land)).

Total Costs (TC)

Total Cost = Total Fixed Cost + Total Variable Cost (TFC + TVC) Total cost rises with input, first at a reducing rate and then at an increasing rate.

Marginal Product (MP)

Marginal Product is shown between the rows because it refers to the change in output from one level of labour input to another. Marginal product increases and then decreases as input decreases. MP intersects the average product curve at its highest point.

Marginal Costs (MC)

Marginal costs decreases and then increases as output increases. MC intersects the AVC and ATC curves at their lowest prices. MC = Change in TC / Change in q (output).

Industries with Long Short Run

Nuclear power

Total Variable Costs (TVC)

Variable costs vary with output (wages, raw materials). TVC = number of variable factors x cost per factor = V x C TVC rises with output, first at a reducing rate and then at an increasing rate.

Average Fixed Costs (AFC)

Average fixed cost decreases as output rises. Average Fixed Cost = Total Fixed Cost / Output

Difference between ATC and AVC

The difference between the ATC curve and the AVC curve is the AFC, the difference decreases as the output increases.

Average Variable Cost (AVC)

AVC falls at first, as output increases but then increases as output increases. AVC = TVC / q = Total Variable Cost / Output

Total Product. (TP)

As the quantity of labour increases, the rate of output (TP) increases. TP rises with input, first at an increasing rate and then at a decreasing rate.

Average Product (AP)

Average Product is found by dividing the total product by the amount of labour required to produce that product. AP increases and then decreases as input increases. The marginal curve intersects the average product at its highest point.

Average Total Costs (ATC)

Average total cost decreases and then increases as output increases. ATC = AFC + AVC = TC / q = TFC / q + TVC / q

Industries with Short Short Run

Call centres, digging holes, internet based...

The Law of Diminishing Returns

The hypothesis of eventually diminishing marginal returns: As extra units of a variable are added to a given quantity of a fixed factor, the output from each additional unit of the variable factor will eventually diminish. (MP curve).

The Long Run

The long run is that period of time in which all factors of production are variable, but the state of technology is fixed. All planning takes place in the long run. (In your head).

Lowest Points

The lowest points of ATC and AVC are intersected by the MC curve. ATC's lowest point is the capacity output, producing beyond that point is inefficient.

TC Graph

x-axis = Costs x-axis = Output Straight line, intersects the y-axis on the TFC curve.

TVC graph

x-axis = Costs x-axis = Output Straight line, passes through the origin, 0.

MP and AP graphs

y-axis = Output x-axis = Variable Factor MP curve intersects the AP curve at its highest point (the point of diminishing average return.) The highest point of the MP curve is called the point pf diminishing marginal return.

TP graph

y-axis = Output x-axis = Variable Factor The TP curve increases and then stagnates.

Fixed Factor

Often the fixed factor is some element of capital, but this is not always the case (for example a type of highly skilled labour such as specialist machine operator, or a circle ball marker...).