INTRODUCTORY ECONOMICS

THEORY OF PRODUCTION
AND COST

Jamila Allana B. Valdez

COST IN THE SHORT-RUN
SHORT RUN COSTS

Explicit Costs Require an outlay of money

Implicit Costs Do not require cash outlay

Accounting
Accounting Profit = Total Revenue – Total Explicit Cost
Profit
Economic Economic Profit = Total Revenue – Total Cost (including explicit
Profit cost & implicit cost)

Normal Profit The minimum return to maintain a resource in its current use

ECON 122– INTRODUCTORY ECONOMICS

FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS
Fixed Costs
o Costs that do not change as the level of output changes.
o Since fixed costs do not change as output changes, the total fixed cost line is
flat at the level of fixed cost.

Variable Costs
o Costs that change as output changes
o Variable cost increases as more output produced
o If no production takes place, variable costs are zero.
o If increasing returns, total variable costs increasing at a decreasing rate
o If diminishing marginal returns, total variable costs increasing at an increasing
rate
ECON 122– INTRODUCTORY ECONOMICS
FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS
Total Costs
o Total costs are the sum of total fixed costs and total variable costs.
o Total cost begins at the level of fixed costs and is shifted up above the total
variable cost by the amount of the fixed cost.
o 𝑻𝑪 = 𝑻𝑭𝑪 + 𝑻𝑽𝑪

ECON 122– INTRODUCTORY ECONOMICS

FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS
100
Q FC VC TC 90
TC

0 12 0 12 80 VC
70
1 12 10 22
60
2 12 18 30

Costs
50

3 12 29.5 41.5 40

4 12 45.7 57.7 30
FC
20
5 12 64.2 76.2
10
6 12 83.2 95.2 0
0 1 2 3 4 5 6 7

Quantity

ECON 122– INTRODUCTORY ECONOMICS

MARGINAL COSTS
Total Costs
o MC is the change in total cost divided by the change in output.

o Alternatively, MC can also be computed by dividing the change in total

variable cost by the change in quantity.

ECON 122– INTRODUCTORY ECONOMICS

AVERAGE COSTS
o Average Fixed Cost (AFC) is total fixed cost per unit of output.

o Average Variable Cost (AVC) is total variable cost per unit of output.

o Average Total Cost (ATC) is total cost per unit of output.

ECON 122– INTRODUCTORY ECONOMICS

FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS
25.00
Q TC MC
MC
0 12 20.00

1 22 10

Marginal Cost
15.00
2 30 8
3 41.5 11.5 10.00

4 57.7 16.2
5.00
5 76.2 18.5
6 95.2 22 0.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

Quantity

ECON 122– INTRODUCTORY ECONOMICS

FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS
14.00
Q FC AFC
12.00
0 12 n/a

Average fixed Cost

10.00
1 12 12
2 12 6 8.00

3 12 4 6.00

4 12 3 4.00

5 12 2.4 2.00 AFC

6 12 2 0.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

Quantity

ECON 122– INTRODUCTORY ECONOMICS

FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS
16
Q VC AVC
14 AVC
0 0 n/a

Average variable Cost

12

1 10 10 10

2 18 9 8

3 29.5 9.83 6

4 45.7 11.425 4

5 64.2 12.84 2

6 83.2 13.87 0
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

Quantity

ECON 122– INTRODUCTORY ECONOMICS

FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS
25
Q TC ATC
0 12 n/a 20

Average variable Cost

1 22 22 ATC
15
2 30 15
3 41.5 13.83 10

4 57.7 14.425
5
5 76.2 15.24
6 95.2 15.86 0
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

Quantity

ECON 122– INTRODUCTORY ECONOMICS

 FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS
Q ATC AVC AFC MC 25

0 n/a n/a n/a MC

20
1 22 10 12 10
ATC
ATC
2 15 9 6 8 15

Costs
AVC
3 13.83 9.83 4 11.5
10
4 14.425 11.425 3 16.2
5 15.24 12.84 2.4 18.5 5
AFC
6 15.86 13.87 2 22
0
0 1 2 3 4 5 6 7

Quantity

ECON 122– INTRODUCTORY ECONOMICS

FIXED COSTS, VARIABLE COSTS AND TOTAL COSTS

25

MC
When MC < ATC, ATC is
20 falling.
ATC
ATC
ATC
15
When MC > ATC, ATC
AVC is
Costs

rising
10

5 MC curve crosses the ATC

AFC
curve at the ATC curve’s
0
0 1 2 3 4 5 6 7 minimum.
Quantity
ECON 122– INTRODUCTORY ECONOMICS
THANK YOU.