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# Short Run Production Cost

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Short Run Production Cost

Have you ever thought of opening a business? There are many things behind the scenes that business owners have to contend with, one of the most critical being the cost of running the business. Being able to accurately calculate business expenses is important for the financial health of a company. Understanding the short-run production cost is an important step in figuring out the fixed and variable costs associated with a firm as well as being able to interpret the graph showing the short-run production cost curve. If all of this is interesting to you, you've come to the right place!

## Defining Short-Run Production Cost

The definition of short-run production cost is the combined fixed and variable costs a company incurs to produce a good or service in the short run. Short-run production experiences fixed production costs because capital is fixed in the short term, such as the size of a warehouse or the pieces of heavy machinery. Fixed costs remain constant regardless of production output. Variable cost changes depending on production output. In the long run, none of the production inputs are fixed, including physical capital.

Do you want to find out why capital is not fixed in the long run? Our explanation Long-run Production Costs will teach you all about it!

Short-run production costs are the total of fixed and variable costs incurred by the production of a good or service where factors such as land and heavy machinery cannot change in the short term.

Fixed production costs are costs that remain constant regardless of production input or output and cannot change in the short term.

Variable production costs are costs that can vary depending on the level of input and output.

And there are still a few more definitions:

The total cost of production is the fixed cost plus the variable cost. This is how much it costs a company to operate at a specific quantity of labor and output.

The marginal cost is the change in the total cost when producing an additional unit. The marginal cost is important because it will help us identify when we have reached our peak level of output.

The law of diminishing marginal returns

The law of diminishing marginal returns states that output increases at a decreasing rate as it approaches the maximum output capacity of the fixed input. As labor increases, the productivity of each additional worker decreases.

Imagine a restaurant. At first, there is just one person working there doing all the tasks like cooking, cleaning, and serving. Then another worker is hired and the first worker can focus on cooking while the second can clean and serve the patrons. The workers are specialized which increases production efficiency allowing them to cook more food and serve more guests. As they hire a third worker, productivity still increases but not as much as after the second worker. Then as more workers get hired, the restaurant gets more and more crowded with cooks, servers, and cleaning staff that they start bumping into each other, there are not enough stoves for the cooks or sinks to clean dishes, and output begins to diminish.

## Short-Run Production Cost Function

Figure 1 below shows the total cost (TC) curve. It is made up of the fixed cost (FC) and the variable cost (VC). Since the total cost is the combination of the variable cost and the fixed cost, the total cost curve runs parallel to the variable cost curve. The fixed cost curve is horizontal because the cost is the same regardless of how much output is produced.

Figure 1. Total cost curve, StudySmarter Originals

In Figure 1, the slope of the total cost curve flattens at first, meaning it increases at a decreasing rate because each additional unit becomes cheaper to produce when the workers can specialize and increase efficiency. Then, the slope begins to increase due to diminishing marginal returns. Of course, the shape of the variable cost curve and the total cost curve can look a little different depending on the situation.

A refresher: the short-run production function

The short-run production function will help us calculate the amount of output a company can produce given certain quantities of labor at a fixed level of capital. The short-run production function can be written like this:

Output (Q) is a function of the quantity of labor employed (L) and physical capital (K). Physical capital is fixed in the short run.

As the number of workers increases, so does the quantity of output at a set amount of capital. The marginal product of labor decreases with every additional worker added. This holds true for the law of diminishing marginal returns. The total product (TP) curve is a graphic representation of the production function. It shows how the quantity of the variable input determines the quantity of output at a given quantity of the fixed input.

Figure 2. The total product curve, StudySmarter Originals

In figure 2, the total product curve slopes upward as output increases with each additional unit of labor. However, the curve flattens out as labor increases, indicating that the additional increase in output is decreasing, which is given by the law of diminishing marginal returns.

## Short-Run Production Cost Curve

To figure out the short-run production cost curve, it is necessary to understand where all the values come from and how they interact.

### Calculating total cost

There are several costs that must be calculated so that we can figure out the per-unit cost of production.

Fixed costs are the costs that remain the same regardless of output. Variable costs change with each unit of output. The total cost (TC) is the combination of fixed cost and variable cost.

Next, the marginal cost (MC) is determined when we identify the change in total cost when producing each additional unit. This is the formula for marginal cost:

,

wheremeans "change in", and Q is the quantity of output.

Now, let's take a look at firm A's marginal cost. They need to figure out the marginal cost of producing each additional unit.
 Quantity Fixed cost Variable cost Total cost Marginal cost 0 $10$0 $10 N/A 1$10 $25$35 2 $10$36 $46 3$10 $44$54
Table 1. Calculating marginal cost, StudySmarter

To learn more about marginal cost, check out our explanation: Marginal Cost

### Calculating average total cost, average variable cost, and average fixed cost

Calculating the average total cost (ATC), the average variable cost (AVC), and the average fixed cost (AFC) is pretty straightforward. We are calculating an average, so we divide the cost by the quantity (Q) to arrive at the per-unit cost.

Now, let us take a look at table 3 where we combine all the calculations we just learned. Here, we will use a fictional data set for Company C, where we are also including units of labor to see the changes in output for each additional unit of labor. We are assuming here that labor is the only variable input of production for Company C:

 Labor Quantity Fixed cost Variable cost Total cost Marginal cost Average total cost (ATC) Average variable cost (AVC) Average fixed cost (AFC) 0 0 $75$0 $75 N/A N/A N/A N/A 1 15$75 $60$135 $4$9 $4$5 2 36 $75$120 $195$1.67 $5.42$3.33 $2.08 3 52$75 $180$255 $3.75$4.9 $3.46$1.44 4 62 $75$240 $315$6 $5.08$3.87 $1.21 5 69$75 $300$375 $8.57$5.43 $4.35$1.09 6 74 $75$360 $435$12 $5.88$4.86 $1.01 Table 2. Different types of costs, StudySmarter There is so much more to learn about average costs! Take a look at our explanation: Average Cost ## Short-Run Production Cost Graph The short-run production cost graph shows the interaction between the different cost curves. Figure 3. Short run production cost curve, StudySmarter Originals Take a look at figure 3 above. The average fixed cost (AFC) curve drops sharply with the initial increase in the quantity produced, but the decrease slows down as the quantity becomes larger because the fixed cost does not change and is continuously divided by a larger and larger quantity. The marginal cost (MC) curve decreases initially because the marginal cost of each additional unit of labor decreases as workers specialize. Then, as the law of diminishing returns sets in, the marginal cost begins to increase again as the benefits from workers specializing are exhausted and the benefit of each additional unit of labor shrinks. Point A is where MC and AVC intersect at the minimum average variable cost. Point B is where MC and ATC intersect at the minimum average total cost. The minimum costs are important. Read our explanation on Cost Minimization to find out why! If we want to calculate the cost of production at a specific output level, Q, we multiply the quantity and the corresponding cost on the ATC curve at that quantity. ## Short-Run Production Cost Examples Some short-run production cost examples are fixed costs and variable costs. An example of a fixed short-run production cost is capital. Capital is usually something that is not easily purchased or replaced -- think about warehouse space, heavy machinery, an oven in a pizza parlor, new trucks and boats for shipping business, or larger office space to hold more employees. It is only fixed in the short run because, in the long run, a firm can choose to invest in expanding their capital if they deem it profitable. Blue Firm produces 12 gadgets at$30 per unit. Their average fixed costs amount to $10. What is the total production cost? How much of it is fixed cost and how much of it is variable cost? Total production cost: The fixed cost is: The total variable cost is: Wages for administrative workers can be considered a fixed cost, if we assume that the number of administrative people at the firm stays the same regardless of how much the firm produces. But production workers are a variable cost because the firm can decide to hire more or fewer workers depending on how many goods they are producing. Other examples of variable short-run production costs are the costs of inputs and labor. Examples of inputs are the metal used to produce car bodies, the flour used in pizza crust, the polyester and cotton used in clothing, agave used to produce tequila, or the clay sourced to make porcelain. These are all input products or ingredients that are required in the production of a good. The more final goods that the firm produces, the more inputs it will require. Red Firm produces 225 widgets at$16 per unit. Their average fixed cost is $4. What is their total variable cost? First, we need to calculate the total production cost and the total fixed cost. Total production cost: Total fixed cost: This means that the total variable cost is: ## Short Run Production Cost - Key takeaways • Short-run production costs are the total of fixed and variable costs incurred by the production of a good or service where factors such as land and heavy machinery cannot change in the short term. • Fixed costs remain constant regardless of production output. Variable costs can change depending on production output. In the long run, none of the variables are fixed, including physical capital. • The marginal cost is the change in the total cost with each additional unit of output. • Fixed costs are the costs that remain the same regardless of output. Variable costs change with each unit of output. The total cost is the sum of fixed cost and variable cost. ## Frequently Asked Questions about Short Run Production Cost Short run production cost is the total of fixed and variable costs incurred by the production of a good or service where factors such as land and heavy machinery cannot change in the short term. To derive the short-run production cost we combine a firm's fixed costs and its variable costs to determine its total cost of production. The short-run production cost graph includes several components: the marginal cost, the average total cost, the average variable cost, and the average fixed cost. The formula for calculating the short-run production cost is the quantity of output multiplied by the average total cost at the given quantity. Some short-run production cost examples are fixed costs like capital and variable costs like the cost of inputs used in producing other products. ## Final Short Run Production Cost Quiz Question How can we calculate the average cost? Show answer Answer Average Cost is calculated by dividing the total cost by the total output. Show question Question What is the average cost function? Show answer Answer The average total cost function has a U-shape, which means it is decreasing for low levels of output and increases for larger output quantities. Show question Question Why is the long-run average cost curve U-shaped? Show answer Answer The U-shape structure of the Average Cost Function is formed by two effects: the spreading effect and the diminishing returns effect. The average fixed cost and average variable cost are responsible for these effects. Show question Question Which one is the definition of Average variable cost (AVC)? Show answer Answer The average variable cost equals the total variable cost per unit of produced quantity. Show question Question Which one is the definition of Average fixed cost (AFC)? Show answer Answer The average fixed cost shows us the total fixed cost for each unit. Show question Question How does the average fixed cost change with an additional unit of production? Show answer Answer The average fixed cost decreases with increasing produced quantity Show question Question Why does the average fixed cost decrease with increasing produced quantity? Show answer Answer Since the total fixed cost is fixed, the more you produce, the average fixed cost per unit will decrease further. Show question Question What is the spreading effect? Show answer Answer Since the total fixed cost is fixed, the more you produce, the average fixed cost per unit will decrease further. This is the reason why we have a falling average fixed cost curve. Since the fixed cost is spread over the produced quantity, given a certain amount of fixed cost, the average fixed cost decreases as the output increases. Show question Question What is the diminishing returns effect? Show answer Answer Since a greater amount of variable input would be necessary as the output increases, there are higher average variable costs for higher levels of produced outputs. Show question Question How do the spreading effect and diminishing returns effect cause the U-shape of the Average Cost Function? Show answer Answer For lower levels of output, the spreading effect dominates the diminishing returns effect, and for higher levels of output, the contrary holds. Show question Question What is the minimum-cost output? Show answer Answer The corresponding quantity where the average total cost is at its minimum level. Show question Question Which is true? Show answer Answer The average total cost function has a U-shape, which means it increases for low levels of output and decreases for larger output quantities. Show question Question Which is true? Show answer Answer If we add the average fixed cost and average variable cost, we should find the average total cost. Show question Question If a firm has an average variable cost of$20 and an average fixed cost of $10, what is the average total cost? Show answer Answer$30

Show question

Question

If a firm has an average total cost of $20 and an average fixed cost of$10, what is the average variable cost?

$10 Show question Question What is the definition of cost minimization? Show answer Answer The rule in which producers seek the most cost-effective balance between inputs of capital and labor. Show question Question What is the law of diminishing returns? Show answer Answer It is an economic law stating that if one input increases, then at a certain point, the resulting output will start to increase at a lesser rate. Show question Question What are the two conditions for cost minimization? Show answer Answer (1) The value is on the y-isoquant, and (2) no other value on the y-isoquant is on a lower isocost line. Show question Question What does the term "returns to scale" mean? Show answer Answer It is the rate at which output changes if all inputs are changed by a proportionate factor. Show question Question Is there only one approach to calculate cost minimization? Show answer Answer The cost minimization formula may be used to find the most cost-effective combination of inputs. However, if there are given scenarios, one also can find the cost-minimized scenario by comparing total cost of capital and labor. Show question Question What is an isocost line? Show answer Answer It represents all combinations of labor and capital that cost the same total amount. Show question Question What is the y-isoquant? Show answer Answer It shows the optimal combination of labor and capital that produces the maximum output at minimum cost. Show question Question If output per dollar of capital is greater than output per dollar of labor, what would a firm have to do in order to reach cost minimization? Show answer Answer The firm would need to rent more capital and hire less labor until the decreasing marginal product of capital per dollar reaches the increasing marginal product of labor per dollar. Show question Question If output per dollar of labor is greater than output per dollar of capital, what would a firm have to do in order to reach cost minimization? Show answer Answer The firm would need to hire more workers and rent less capital until the decreasing marginal product of labor per dollar reaches the increasing marginal product of capital per dollar. Show question Question Which comparison of labor and capital might use the cost minimization approach? Show answer Answer All of these comparisons would use the cost minimization approach. Show question Question What is a substitute? Show answer Answer It is a good that can be replaced with similar goods. For example, if someone doesn't have access to a car, then that person may use a bus or a bicycle instead. Show question Question What is a complement? Show answer Answer It is a good that is typically bought with another good. For instance, hot dogs and hot dog buns are considered complements. Show question Question What is an example of substitute goods? Show answer Answer tea and coffee Show question Question What is an example of complementary goods? Show answer Answer a suit and a tie Show question Question What is marginal cost? Show answer Answer Marginal Cost is the change in total cost caused by producing one more unit of product. Show question Question What is the difference between marginal cost and marginal revenue? Show answer Answer The marginal cost is the change in total production cost that comes from making or producing one additional unit. Marginal revenue, on the other hand, is the increase in revenue that comes from the sale of one additional unit. Show question Question How to calculate the marginal cost? Show answer Answer We can calculate the marginal cost by dividing the change in total cost by the change in the quantity of output. Show question Question What is the formula for marginal cost? Show answer Answer We can calculate the marginal cost by dividing ΔTC (which stands for the change in total cost) by ΔQ (which stands for the change in the quantity of output). Show question Question What is the marginal cost curve? Show answer Answer The marginal cost curve graphically represents the relationship between the marginal cost incurred by a firm in the production of a good or service and the quantity of output produced by this firm. Show question Question What is the minimum-cost output? Show answer Answer The point where the marginal cost curve intersects the average total cost curve shows the minimum-cost output. Show question Question The marginal cost curve usually has a U-shape, which means the marginal cost decreases for low levels of output and increases for larger output quantities. Show answer Answer True Show question Question We are not dividing the total cost itself by the number of total units produced to find the marginal cost. Show answer Answer False Show question Question The marginal cost curve shows how the cost of producing one more unit depends on the quantity that has already been produced. Show answer Answer True Show question Question  Quantity of orange juice (bottles) Fixed Cost of Production Variable Cost of Production Total Cost of Production Marginal Cost 0 100$ 0 $100$ - 1 100 $12$ 112 $A 2 100$ 25 $125$ B 3 100 $39$ 139 $C According to this table, what is the value of A? Show answer Answer 12 Show question Question  Quantity of orange juice (bottles) Fixed Cost of Production Variable Cost of Production Total Cost of Production Marginal Cost 0 100$ 0 $100$ - 1 100 $12$ 112 $A 2 100$ 25 $125$ B 3 100 $39$ 139 $C According to the table, what is the value of the B? Show answer Answer 13 Show question Question  Quantity of orange juice (bottles) Fixed Cost of Production Variable Cost of Production Total Cost of Production Marginal Cost 0 100$ 0 $100$ - 1 100 $12$ 112 $A 2 100$ 25 $125$ B 3 100 $39$ 139 \$ C

What is the value of C?

14

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Question

The average cost is always larger than the marginal cost.

False

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Question

The change in the total cost of production is equal to the change in variable cost because the fixed cost does not change as the quantity produced changes.

True

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Question

What is ΔTC in the marginal cost equation?

ΔTC stands for the change in total cost.

Show question

Question

What is ΔQ in the marginal cost equation?

ΔQ stands for the change in the quantity of output.

Show question

Question

What are short-run production costs?

Short-run production costs are the total of fixed and variable costs incurred by the production of a good or service where factors such as land and heavy machinery cannot change in the short term.

Show question

Question

What are fixed production costs?

Fixed production costs are costs that remain constant regardless of production input or output and cannot change in the short term.

Show question

Question

What are examples of fixed production costs?

Capital such as warehouse space, heavy machinery, or an oven in a pizza parlor.

Show question

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Is labor a fixed cost or a variable cost?

Variable cost, because a company can chose how many workers to hire.

Show question

Question

What is a variable cost?

Variable costs are costs that can vary depending on the level of input and output.

Show question

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