|Production and Cost in the Short Run|
The production function gives the maximum amount of output that can be produced from any given combination of inputs, given the state of technology. The production function assumes technological efficiency in production, because technological efficiency occurs when the firm is producing the maximum possible output with a given combination of inputs. Economic efficiency occurs when a given output is being produced at the lowest possible total cost.
In the short run, at least one input is fixed. In the long run, all inputs are variable. This chapter examines the
short-run situation when only one input is variable, labor (L), and one fixed, capital (K). In the short run, the total product curve, which is a graph of the short-run production relation
In the short run when some inputs are fixed, short-run total cost (TC) is the sum of total variable cost (TVC) and total fixed cost (TFC):
Average fixed cost is total fixed cost divided by output:
Average variable cost is total variable cost divided by output:
Average total cost is total cost divided by output:
Short-run marginal cost (SMC) is the change in either total variable cost or total cost per unit change in output:
A typical set of short-run cost curves is characterized by the following features: (1) AFC decreases continuously as output increases, (2) AVC is
The link between product curves and cost curves in the short run when one input is variable is reflected in the following relations:
When MP (AP) is increasing, SMC (AVC) is decreasing. When MP (AP) is decreasing, SMC (AVC) is increasing. When MP equals AP at AP 's maximum value, SMC equals AVC at AVC's minimum value. Similar but not identical relations hold when more than one input is variable.