Types of Costs in the Short Run
In the short run, at least one input is fixed — usually capital. This gives rise to different types of production costs.
- Total Fixed Cost (TFC): Costs that don’t change with output (e.g. rent)
- Total Variable Cost (TVC): Costs that change with output (e.g. wages, materials)
- Total Cost (TC) = TFC + TVC
Per Unit Costs
- Average Fixed Cost (AFC) = TFC / Q → decreases as output increases
- Average Variable Cost (AVC) = TVC / Q
- Average Total Cost (ATC) = TC / Q or AFC + AVC
- Marginal Cost (MC) = ΔTC / ΔQ → the cost of producing one more unit
Graph Behavior
- AFC always declines as output increases
- AVC and ATC are U-shaped due to diminishing returns
- MC intersects AVC and ATC at their minimum points
Why U-shaped? Initially, efficiency rises, then diminishing marginal returns kick in.
Real-World Example
Imagine running a food truck:
- Rent is your TFC
- Ingredients and hourly wages are your TVC
- The more tacos you sell, the more your AVC and MC matter
Key Takeaways
- Costs behave differently in the short run
- Marginal cost is critical for decision-making
- Understanding cost curves helps firms set prices and production levels
