Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAPTER 7
Costs of Production
7.1 SHORT-RUN TOTAL COST CURVES
Cost curves show the minimum cost of producing various levels of output. Both explicit and implicit costs
are included. Explicit costs refer to the actual expenditures of the firm to purchase or hire the inputs it need.
Implicit costs refer to the value of the inputs owned by the firm and used by the firm in its own production processes.
The value of these owned inputs should be imputed or estimated form what they could earn in their best
alternative use (see Problem 7.1).
In the short run, one or more (but not all) factor of production are fixed in quantity. Total fixed costs (TFC)
refer to the total obligations incurred by the firm per unit of time for all fixed inputs. Total variable costs (TVC)
are the total obligations incurred by the firm per unit of time for all the variable inputs it uses. Total costs
(TC) equal TFC plus TVC.
EXAMPLE 1. Table 7.1 presents hypothetical TFC, TVC, and TC schedules. These schedules are plotted in Fig. 7-1
.
Table 7.1
Q TFC ($) TVC ($) TC ($)
0 60 0 60
1 60 30 90
2 60 40 100
3 60 45 105
4 60 55 115
5 60 75 135
6 60 120 180
Fig. 7-1
From Table 7.1, we see that TFC are $60 regardless of the level of output. This is reflected in Fig. 7-1 in a TFC curve
which is parallel to the quantity axis and $60 above it. TVC are zero when output is zero and rise as output rises. The particular
shape of the TVC curve follows directly from the law of diminishing returns. Up to point T 0 (the point of inflection),
the firm is using so few of the variable inputs together with its fixed inputs that the law of diminishing returns is not yet
operating. So the TVC curve is concave downward and TVC increase at a decreasing rate. At point T 0 , the law of diminishing
returns beings to operate, so to the right of point T 0 , the TVC curve is concave upward and TVC increase at an increasing
rate. At every output level, TC equal TFC plus TVC. Thus the TC curve has the same shape as the TVC curve but is everywhere
$60 above it.
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