David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 7 Costs and supply
0 The term cQ + dQ 2 denotes the short-run variable cost that varies with output Q.
Therefore, from ( 1) we have: SFC = F and SVC= cQ + dQ 2
The short-run marginal cost is measured by the change in the STC as Q changes:
The short-run average fixed cost is given by:
dSTC
SMC = =c+2dQ
dQ
SAFC = SFC = F
Q Q
The short-run average fixed cost decreases steadily as Q increases.
The short-run average variable cost is given by:
The short-run average total cost is given by:
SVC
SAVC = - =c+dQ
Q
STC F
SATC = - =-+c+dQ
Q Q
(2)
(3)
(4)
(5)
The firm's short-run output
decision is to supply 01, the
output at which MR = SMC,
if the price covers short-run
average variable cost SAVC1
at that output. If not, the firm
supplies zero.
A firm's output decision in the short run
Figure 7.7 illustrates the firm's short-run output decision. Short-run marginal
cost is set equal to marginal revenue to determine the output Q1 that maximizes
profits or minimizes losses.
Next, the firm decides whether or not to produce in the short run. Profit is positive
at the output Q1 if the price p at which this output is sold covers average total cost.
It is the short-run measure SATC1 at output Q1 that is relevant. If p exceeds SATC1>
the firm makes profits in the short run and produces Q1.
Suppose p is less than SATC1• The firm is losing money because p does not cover costs. In the long run the
firm closes down if it keeps losing money. In the short run, even at zero output the firm must pay its fixed
costs. The firm needs to know whether losses are bigger if it produces at Q1 or produces zero.
If revenue exceeds variable cost the firm is earning something towards its overheads. It produces Q1 if
revenue exceeds variable cost even though Q1 may involve losses. The firm produces Q1 if p exceeds SAVC1•
If not, it produces zero. Table 7.5 summarizes the short-run output decisions of a firm.
Table 7.5
The firm's output decision in the short-run
Short run
Marginal condition
Choose the output at
which MR = SMC
Check whether to produce
Produce this output if p > SAVC.
Otherwise, produce zero.
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