3.2 Short-Run Production Costs
Short-run costs split into fixed and variable; marginal cost cuts both ATC and AVC at their minimum points, and AFC falls continuously as output rises.
In the short run, total cost = total fixed cost (paid even at zero output — rent, loan payments) + total variable cost (rises with output — labor, materials). Dividing each by quantity gives AFC, AVC, and ATC, where ATC = AFC + AVC at every quantity.
Marginal cost is the cost of one more unit: MC = ΔTC ÷ ΔQ (equally ΔTVC ÷ ΔQ, since fixed cost never changes). MC falls at first, then rises because of diminishing marginal returns — when each worker adds less output, each unit of output costs more.
The geometry is heavily tested: MC intersects both AVC and ATC at their MINIMUM points, because whenever the marginal is below the average it pulls the average down, and whenever above it pulls it up. AFC declines continuously as output spreads fixed cost over more units, which is also why the ATC-AVC gap shrinks as quantity grows.
Key terms for 3.2
Drag the curves yourself — the fastest way to make 3.2 stick.
Drawing MC crossing ATC or AVC somewhere other than their minimums. MC below an average pulls it down, MC above pulls it up — so MC must pass through each average's lowest point.
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