Micro CHAPTER 3.2:

Short-Run Production Costs

CHAPTER SUMMARY

Businesses face two main types of costs:

Fixed costs: costs that do not depend on how much we produce. For example, whether I sell zero cupcakes or a thousand cupcakes, I still have to pay the same rent.
Variable costs: costs that change based on how much I produce. For example, if I sell more cupcakes, I need to spend more money on sugar and butter.

We also consider costs by two time frames:

Short-run: the time in which at least some inputs/costs cannot be changed.
Long-run: the time in which we can change all of our inputs/costs. Eventually, if we don't need as much space for our business anymore, we can change our short-run fixed costs, such as rent. Because of this, economists say that, in the long run, all costs are variable.

The chart on the left shows fixed, variable, and total (fixed + variable) costs on a graph. As we increase the quantity we produce, FC does not change. VC goes up as we produce more. TC is simply VC + FC, so the VC and TC curves will always run parallel to each other, with the space between them equal to the FC.

The chart on the right shows the cost functions of a business. It includes the following items:

AFC - Average Fixed Cost: This is (FC / Quantity). This is downward-sloping, and always approaches the x-axis.
AVC - Average Variable Cost: This is (VC / Quantity). This starts downward-sloping, and eventually starts curving upward due to diminishing marginal returns.
ATC (AC) - Average Total Cost. This is (TC / Quantity) or (AFC + AVC). This starts downward-sloping above the AVC curve and follows its shape, gradually getting closer to the AVC.
MC - Marginal Cost. This starts downward-sloping below, then turns upward and crosses through the lowest point of the AVC and ATC curves.

Notice that none of the lines on the chart touch the Y-axis. This is because everything except the fixed costs should be $0 or undefined when we produce nothing. If there is a change in marginal cost, it would shift all of the curves except AFC.

CHAPTER VIDEOS

(Just section 3.2)

CHAPTER READINGS

AP Micro Unit 3.2 Short Run Production Costs | FiveableIn this AP Micro guide, we will address all the short-run costs associated with production and highlight important vocabulary you should know

What Do I Need to Know About Cost Curves? - ReviewEcon.comUpdated 2/6/2022 Jacob ReedCostsImplicit and explicit costs were already covered in the cost revenue, and profit review. Below are more costs you need to know and each of them includes both implicit and explicit costs. The total cost curves are important, but pay special attention to the average cost curves. They will be important on most ... Read moreWhat Do I Need to Know About Cost Curves?

CHAPTER PRACTICE

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