Short run costs

The cost function gives the least cost of producing each level of output, for given input prices and technology.

In the short run, costs are of two kinds:

• Total fixed cost (TFC): costs that do not change with output, like rent of the factory. It must be paid even at zero output.
• Total variable cost (TVC): costs that rise with output, like raw materials and wages.
• Total cost: TC = TFC + TVC. At zero output, TC = TFC.

Per-unit costs:

• AFC = TFC ÷ q; AVC = TVC ÷ q;
• short-run average cost: SAC = TC ÷ q = AFC + AVC;
• short-run marginal cost: SMC = ΔTC (the cost of one more unit). Since TFC does not change, SMC also = ΔTVC.

Example: TFC = 30. At q = 4, TVC = 24; at q = 5, TVC = 28. At q = 5: TC = 58; AFC = 6; AVC = 5.6; SAC = 11.6; SMC = 28 − 24 = 4.

The sum of all the SMCs gives TVC, and AVC is the average of the SMCs.