"Our analysis of production and cost begins with a period economists call the short run....
"At any one time, a firm will be making both short-run and long-run choices. The managers may be planning what to do for the next few weeks and for the next few years.
"Their decisions over the next few weeks are likely to be short-run choices. Decisions that will affect operations over the next few years may be long-run choices, in which managers can consider changing every aspect of their operations. Our analysis in this section focuses on the short run."
- Principles of Microeconomics
Activity
Boundless: "Production"
- Read this chapter on production. It will provide you with mathematical analysis of the topics in unit 5.
Principles of Microeconomics: "Chapter 8, Section 1: Production Choices and Costs: The Short Run"
- Read this section to learn about the behavior of the producer in the short run. Attempt the "Try It” problems at the end of the section before checking your answers. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter.
"Understanding Normal Profit"
- Watch this video about how a coffee shop owner decides whether to keep is shop open or take another job, At the end of the video, consider the role of opportunity costs and how they affect business decisions. Think about times you've had to make choices and how opportunity costs affected those decisions.
The short run production function
Costs in the short run
Activity
"Understanding the Short-Run Shutdown"
- Watch this video about how a baker decides whether to keep her bakery open or to close. At the end of the video, consider the role of costs and how they affect business decisions. Think about examples of businesses which have chosen to shut down.
Khan Academy: "Fixed, Variable, and Marginal Cost"
- Watch this video about fixed, variable, and marginal cost.
Khan Academy: "Visualizing Average Costs and Marginal Costs as Slope"
- Watch this video about visualizing average costs and marginal costs as a slope.
Khan Academy: "Marginal Cost and Average Total Cost"
- Watch this video about marginal cost and average total cost.
Khan Academy: "Marginal Revenue and Marginal Cost"
- Watch this video about marginal revenue and marginal cost.
Khan Academy: "Marginal Revenue below Average Total Cost"
- Watch this video about marginal revenue below average total cost.
Wolfram Demonstrations Project: "Short-Run Cost Curves"
- To use this simulation, you must download and install the Mathematica Viewer from the Wolfram Demonstrations Project. Although this software is free, it is a sizable download. This activity is therefore optional.
- This simulation shows how Total and Marginal Cost curves interrelate and lead a firm to its profit maximization production point.
- Once you have downloaded the software to your desktop, open the simulation and read the instructions. Unlike previous simulations, this one has two panels to analyze: The left panel shows the Total Cost (TC) curve, and the right panel shows the Marginal Cost (MC) curve.
- The lettered sliders correspond to the following variables:
- a = the slope of the TC curve
- b = the slope of the MC curve = the rate of change of the slope of TC
- c = Average Variable Cost
- d = Fixed Costs
- Experiment with changing these variables and note how changes affect the break even point and the shutdown point.
- These curves are the backbone of a firm’s production decisions. All that needs to be added is a Total Revenue curve. As you know, if a firm takes its selling price from the market, its Total Revenue curve (left panel) is a straight line originating at the origin with a slope of 1. The Marginal Revenue curve (right panel) is a horizontal line running from the y-axis, originating at Price. Recall that, with a price taker, P = MR = AR. From this simulation, you can examine various points where MC would equal MR and determine if the firm would be profitable.
- Set all sliders to their mid position (c = 77 and d = 5400) and imagine a Marginal Revenue of $90. What can you tell from the graphs?
- You would see that the firm is profitable and produces about 625 units. In other words, MC and MR intersect at the point (625, 90) because that is where MC = MR. Looking now at the left panel, you can see that to make 625 units, the total cost is about $50,000 and total revenue ($90 times 625 units) is $56,250 – a tidy economic profit!
- Explore the model. Set the variables at different rates, set the market price, and see how that affects the cost curves and profits.
- Note any rational firm will chose to produce only at the point of MC = MR.
