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(Micro)Firms & Decisions Part 1: Costs & Revenue COP (Short-Run…
(Micro)
Firms & Decisions
Part 1: Costs & Revenue
COP
Economic COP
Explicit costs: monetary payment, direct payment to factors originally not owned by firm
Implicit costs: involve opportunity cost, no direct monetary payment
Short-Run COP
Short run: production period during which there's at least one fixed factor
Fixed fatcor: quantities can't be changed within the time period to change output eg. buildings
Variable factor: can be changed eg. manpower, raw materials
Total Cost
TC = TFC + TVC
TFC does not vary with output, exists even when output is zero.
TVC varies positively with output
Figure 1: Total cost curves in short run
Before OQ: under-utilization of fixed factor, MC:arrow_down:
After OQ: Law of diminishing marginal returns, over-utilization of fixed factor, MC:arrow_up:
Marginal and Average Costs
MC: additional cost arising from additional output (fixed costs don't contribute)
Average FC/VC: per unit of output
Numerical example
Figure 2: Short-run cost curves
AVC & MC:arrow_down: then :arrow_up: due to LDMR
AC shape influenced by AFC & AVC
MC cuts AVC & AC at minimum points, Q1<Q2