Costs in the short run

1. Costs in the short run

2. Learning outcomes Understand the economist’s concepts of the short and long run Understand the law of diminishing returns Explain what is meant by fixed and variable costs

3. Time periods The long run that period of time when firms are able to vary all their factor inputs The short run that period of time when firms face the problem that some of their factor inputs cannot be changed (fixed)

4. Types of short run costs Transport examples include: Cost of leasing aircraft, maintenance of track (Network Rail), vehicle insurance, depreciation and maintenance (bus & train operators, haulage firms) Fixed costs Costs which are independent of the level of output produced

5. Types of short run costs Transport examples include: fuel, driver hours Variable costs Costs which are directly dependent on the level of output produced

6. Law of diminishing returns The more of a variable input that is added to a fixed input, eventually the smaller will be the additional output produced ‘too many cooks spoil the broth’ This causes the ‘marginal product’ to decline followed by the ‘average product’ Note that before diminishing returns sets in, a firm will experience increasing returns

7. Task 1: physical product Calculate the total, marginal and average product from the information given on the task sheet Draw graphs of these relationships on your task sheet

8. Task 2: costs The variable and total costs of a firm will be affected by increasing and diminishing returns Calculate the total cost, average variable, average fixed, average total and marginal cost on the task sheet Important formula: TC = TFC + TVC ATC = TC / Q AVC = TVC / Q AFC = TFC / Q MC = TC / Q