The Costs of Production

Fixed Costs

Costs of the firm are independent of the level of output of the firm. Fixed costs are the costs that must be paid regardless of what level of output the firm produces.

Variable Costs

Other costs change when output changes: these are the variable costs.

Marginal cost and variable costs

The area under the marginal cost curve gives the variable costs.

Average Cost Function

The average cost function measures the cost per unit of output.

Average Fixed Cost Function

The average fixed cost function measures the fixed costs per unit output.

Average Variable Cost Function

The average variable cost function measures the variable costs per unit of output.

Marginal Cost

The marginal cost curve measures the change in costs for a given change in output. Marginal cost measures a rate of change: the change in costs divided by a change in output.

Short-Run and Long-Run Average Costs

The short-run average cost curve must be tangent to the long-run average cost curve. If the short-run cost is always greater than the long-run cost and they are equal at one level of output, then this means that the short-run and the long-run average costs have the same property.

Total Costs

The total costs of the firm can always be written as the sum of the variable costs and the fixed costs.

Long-Run Cost Function

This is the total cost of producing an output level y, given that the firm is allowed to adjust its plant size optimally. The long-run cost function of the firm is just the short-run cost function evaluated at the optimal choice of the fixed factors.

Long-Run Costs

We have regarded the firm's fixed costs as being the costs that involve payments to factors that it is unable to adjust in the short run. In the long run a firm can choose the level of its "fixed" factors - they are no longer fixed. In the long run there are no fixed costs, in the sense that it is always possible to produce zero units of output at zero costs - that is, it is always possible to go out of business.