Microeconomics for Beginners - Week 5_Video 5 - Short Run Cost Curves

Summary

This video provides a comprehensive introduction to microeconomic cost concepts, focusing on short-run cost curves. It explains key terms like total fixed cost, total variable cost, average cost, and marginal cost, detailing how these costs behave and interact in the production process. The video also covers the relationship between average and marginal costs, demonstrating their impact on business decision-making. Visual aids help viewers understand the shapes of these cost curves, and an interactive activity reinforces the concepts. Overall, it serves as a foundational guide for beginners in microeconomics, particularly in understanding short-run production costs.

Takeaways

• 😀 Cost is defined as a monetary sacrifice made to produce a good or service.
• 😀 In economics, the short-run is the period in which at least one input remains fixed, while the long-run allows all inputs to change.
• 😀 Total Fixed Cost (TFC) remains constant regardless of the level of output produced.
• 😀 Total Variable Cost (TVC) increases with the level of output and decreases when output is zero.
• 😀 Total Cost (TC) is the sum of Total Fixed Cost and Total Variable Cost.
• 😀 Average Cost (AC) is the total cost divided by the number of units produced.
• 😀 Average Fixed Cost (AFC) is the Total Fixed Cost divided by the level of output.
• 😀 Average Variable Cost (AVC) is the Total Variable Cost divided by the level of output.
• 😀 Marginal Cost (MC) is the change in Total Cost when one additional unit of output is produced.
• 😀 The relationship between Average Cost and Marginal Cost: When MC is below AC, AC falls; when MC is above AC, AC rises.
• 😀 The shapes of the cost curves, such as U-shaped AVC and AC curves, are driven by the law of variable proportion and the concept of diminishing returns.

Q & A

What is the definition of cost in economics?

Cost is defined as a sacrifice or a foregone opportunity, either already occurred or potentially occurring in the future, with the objective of achieving a specific purpose, typically measured in monetary terms. In production, costs are the payments made for the factors of production, which are required to produce a good or service.

What distinguishes the short run from the long run in economics?

In economics, the short run refers to a period in which at least one input remains fixed, such as land, machinery, or buildings. In contrast, the long run is a period where all inputs become variable, allowing firms to adjust all factors of production.

What is total fixed cost, and how does it behave as output changes?

Total fixed cost refers to costs that do not change with the level of output. Examples include rent or the cost of machinery. Regardless of how much is produced, the total fixed cost remains constant, represented as a horizontal line on a graph.

How does total variable cost change with output, and what are some examples?

Total variable cost changes in direct relation to the level of output. It increases as production rises, and decreases when production stops. Examples include raw materials and wages paid to labor. If no output is produced, total variable cost is zero.

How is total cost calculated in the short run?

Total cost is the sum of total fixed cost and total variable cost. It represents the overall cost incurred by a firm for producing a given level of output, starting from an intercept on the y-axis due to the fixed cost component.

What is the formula for average cost, and how can it be interpreted?

Average cost is calculated as the total cost divided by the level of output. It represents the cost per unit of output. Additionally, it can be derived by adding the average fixed cost and the average variable cost.

How is marginal cost defined, and why is it important?

Marginal cost is the change in total cost when producing one additional unit of output. It is crucial because it helps firms make decisions regarding production levels, with most production decisions based on marginal cost.

What is the shape of the average variable cost and average cost curves?

Both the average variable cost and the average cost curves are U-shaped. Initially, as output increases, the costs decline due to increasing returns to scale. However, after a certain point, diminishing returns set in, causing the costs to rise and creating the U-shape.

What does the marginal cost curve look like, and why is it shaped this way?

The marginal cost curve is typically J-shaped. It starts by declining sharply and then rises sharply due to the law of variable proportion. The behavior of the marginal cost curve pulls the average cost down when it is falling and pulls it up when it starts rising.

What is the relationship between average cost and marginal cost?

The marginal cost curve intersects the average cost curve from below. When marginal cost is lower than average cost, it pulls the average cost down. When marginal cost exceeds average cost, it pulls the average cost up. The marginal cost curve reaches its minimum before the average cost curve does.