SHORT-RUN AND LONG-RUN COSTS

Date: 2015-10-07; view: 395.

Reading

Discussion

Work in pairs.

Using the key vocabulary, discuss what you have learned about explicit and implicit

costs.

1.Read text 31 about short-run and long run costs and fill each gap with one of these

words.

average leased fixed increases marginal variable constant determine

TEXT 31

In the short run some inputs are (a)__________ . Since these inputs have to be paid

regardless of the level of output produced, these payments to the fixed inputs remain (b)

_______ no matter what level of output is produced. Such payments are called fixed

costs. An example of a fixed cost is a machine that is (c)__________ for one year at a cost

of $500 per month. The cost of the machine is $500 every month for one year regardless of how many units of output are produced using the machine. Even if the firm shuts down for a month and does not use the machine, the firm still must pay $500 for the machine that month.

The payments to variable inputs are called variable costs. Producing more output requires more variable inputs. Thus, variable costs increase as the level of output increases. Examples of variable costs would be the payments for many types of labour, ingredient inputs or raw materials, or the energy used in production. As noted above, in the short run the levels of use of some inputs are fixed, and the costs associated with these fixed inputs must be paid regardless of the level of output produced. Total fixed cost (TFC)is the sum of the short-run fixed costs that must be paid regardless of the level of output produced. Total variable cost (TVC)is the sum of the amounts spent for

each of the variable inputs used. Total variable cost (d)____________ as output increases.

Short-ran total cost (TC), which also increases as output increases, is the sum of total variable and total fixed cost:

TC = TVC + TFC

The long ran simply means that all input are (e)___________ to the firm. One of the first

decision to be made by the firm is to (f)_________ the scale of operations, that is, the size

of the firm. To make this decision, a manager must know the cost of producing each relevant of output.

Similar to the short ran, we define long-run (g)________ cost as

LAS = Long-run total cost (LTC)/Output (Q)

and long-run (h)_______ cost as

LMC = ∆LTC/∆Q

2. Comprehension check.

Say if he following sentences are true or false. Correct the false ones.

a) Total fixed cost is the total amount paid for fixed inputs. Total fixed cost can vary with output.

b) Total variable cost is the amount paid for variable inputs, it increases with increases in output.

c) Total cost is the sum of total fixed cost and total variable cost, it increases with increases in output.

d) Long run average cost is long run total cost divided by output.