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AP® Microeconomics · Unit 3 · Topic 3.2

Short-Run Production Costs: Revision Notes (Microeconomics 3.2)

One-page recap of short-run costs: fixed and variable cost, the seven cost formulas, the shapes of the cost curves, how they link to production, and what shifts them.

Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.

Recap

  • In the short run some inputs are fixed, so costs split into fixed (do not vary with output, paid even at zero output) and variable (rise with output, zero at zero output).
  • Specialisation and the division of labour make MC fall at low output. Diminishing marginal returns make MC rise after that.
  • AFC falls at every output. AVC and ATC are U-shaped. MC cuts both at their minimum points.
  • The gap between ATC and AVC is AFC, so it narrows as output rises. Minimum ATC is at a larger output than minimum AVC.

Key relationships

Relationship How to use it
TC = TFC + TVC TFC = TC at Q = 0
MC = ΔTC ÷ ΔQ = ΔTVC ÷ ΔQ A change between rows; plot halfway between outputs
AFC = TFC ÷ Q; AVC = TVC ÷ Q; ATC = TC ÷ Q Ratios within one row
ATC = AFC + AVC Find any one from the other two
MC = w ÷ MP; AVC = w ÷ AP (labour the only variable input) Max MP ↔ min MC; max AP ↔ min AVC
MC < average → average falls; MC > average → average rises So MC crosses AVC and ATC at their minimums
Change Curves that shift
Variable input price rises (wages, materials) MC, AVC, ATC up; AFC unchanged
Fixed cost rises (rent, insurance, licence) AFC, ATC up; MC, AVC unchanged
Productivity rises MC, AVC, ATC down

Assumptions behind the model

  • At least one input is fixed; input prices and technology are constant along each curve.

Mistakes to avoid

  1. Saying fixed cost is zero at zero output.
  2. Shifting MC when only a fixed cost changes.
  3. Drawing MC through ATC or AVC anywhere other than their lowest points.
  4. Drawing AFC as U-shaped, or letting it touch the axis.
  5. Placing the minimum of ATC at the same output as (or to the left of) the minimum of AVC.
  6. Unlabelled curves and axes: label “Cost ($ per unit)” and “Output (units per period)”.

Quick self-check

  1. TC is $500 at Q = 0 and $740 at Q = 4. Find TFC, TVC, AVC and ATC at Q = 4. (TFC $500; TVC $240; AVC $60; ATC $185)
  2. A firm’s insurance premium rises. What happens to MC? (Nothing: insurance is a fixed cost.)
  3. MC is $18 and ATC is $22. Is ATC rising or falling? (Falling, because MC is below ATC.)

Next: practice questions.

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