3.2 Short-Run Cost Curves

The short run = the period in which at least one input (fixed: plant, office) cannot change; other inputs (variable: labour, raw materials) can. The long run = all inputs variable. The family of curves (learn the definitions, then the shapes): • Total Fixed Cost (TFC) — constant regardless of output (rent): a horizontal line; • Total Variable Cost (TVC) — rises with output, first at a decreasing rate, then increasing; • Total Cost: TC = TFC + TVC; • Average Fixed Cost: AFC = TFC/Q — always falling, a rectangular hyperbola (the same rent spread over ever more clients); • Average Variable Cost: AVC = TVC/Q and Average Total Cost: ATC = TC/Q — both U- shaped; • Marginal Cost: MC = ΔTC/ΔQ — the cost of one more unit; also U-shaped, and cuts AVC and ATC exactly at their minimum points (when MC is below an average, it pulls the average down; above it, pushes it up — the bicycle-rider logic). Why U-shaped (the reason, not just the shape): the law of variable proportions — with fixed plant, extra workers first raise output more than proportionally (increasing returns — averages fall), then diminishing returns set in and averages rise. The minimum of ATC is the most efficient scale in the short run — the point a regulator comparing…