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By the end of this section, you will be able to:

  • Analyze short-run costs as influenced by total cost, fixed cost, variable cost, marginal cost, and average cost.
  • Calculate average profit
  • Evaluate patterns of costs to determine potential profit

The cost of producing a firm’s output depends on how much labor and physical capital the firm uses. A list of the costs involved in producing cars will look very different from the costs involved in producing computer software or haircuts or fast-food meals. However, the cost structure of all firms can be broken down into some common underlying patterns. When a firm looks at its total costs of production in the short run, a useful starting point is to divide total costs into two categories: fixed costs that cannot be changed in the short run and variable costs that can be changed.

Fixed and variable costs

Fixed costs are expenditures that do not change regardless of the level of production, at least not in the short term. Whether you produce a lot or a little, the fixed costs are the same. One example is the rent on a factory or a retail space. Once you sign the lease, the rent is the same regardless of how much you produce, at least until the lease runs out. Fixed costs can take many other forms: for example, the cost of machinery or equipment to produce the product, research and development costs to develop new products, even an expense like advertising to popularize a brand name. The level of fixed costs varies according to the specific line of business: for instance, manufacturing computer chips requires an expensive factory, but a local moving and hauling business can get by with almost no fixed costs at all if it rents trucks by the day when needed.

Variable costs , on the other hand, are incurred in the act of producing—the more you produce, the greater the variable cost. Labor is treated as a variable cost, since producing a greater quantity of a good or service typically requires more workers or more work hours. Variable costs would also include raw materials.

As a concrete example of fixed and variable costs, consider the barber shop called “The Clip Joint” shown in [link] . The data for output and costs are shown in [link] . The fixed costs of operating the barber shop, including the space and equipment, are $160 per day. The variable costs are the costs of hiring barbers, which in our example is $80 per barber each day. The first two columns of the table show the quantity of haircuts the barbershop can produce as it hires additional barbers. The third column shows the fixed costs, which do not change regardless of the level of production. The fourth column shows the variable costs at each level of output. These are calculated by taking the amount of labor hired and multiplying by the wage. For example, two barbers cost: 2 × $80 = $160. Adding together the fixed costs in the third column and the variable costs in the fourth column produces the total costs in the fifth column. So, for example, with two barbers the total cost is: $160 + $160 = $320.

Questions & Answers

the art of managing the production, distribution and consumption.
Satangthem Reply
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Khawar Reply
okk
damfash
marginal utility is the additional satisfaction one derives from consuming additional unit of a good or service.
Fred
It's the allocation of scarce resources.
Fred
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Dishan
marginal utility is the additional satisfaction one derives from consuming additional unit of a good or service.
Fred
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Dishan
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Nurudeen
demand lfs
Alpha
Economics is derived from the word Oikonomia which means management of household things. Thus, Economics is a study of household things with the constrains of allocating scare resources.
Dishan
what is Open Market Operation
Adu Reply
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mirwais
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Dexter
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Alixe Reply
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WARIDI
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simon Reply
marginal cost formula
Nandu Reply
you should differentiate the total cost function in order to get marginal cost function then you can get marginal cost from it
boniphace
What about total cost
Foday
ok
Foday
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simon
formula of cross elasticity of demand
Theresia Reply
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Priyanka
Ceteris paribus - Literally, "other things being equal"; usually used in economics to indicate that all variables except the ones specified are assumed not to change.
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scor
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scor
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amarsyaheed Reply
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Philo
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Frank
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Frank
so
owusu
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owusu
it's a summary of opportunity cost depicted on a curve.
okhiria
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Manuela Reply
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Prosper Reply
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adepojurafiu
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Ukpen
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Babaisa
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Humaira
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Faisal
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Mannan
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igwe Reply
disaster management cycle
Gogul Reply
cooperate social responsibility
igwe
Fedric Wilson Taylor also define management as the act of knowing what to do and seeing that it is done in the best and cheapest way
OLANIYI

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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