Short-run and long-run costs, returns to scale and economies of scale, revenue concepts, and profit maximisation.
Costs in the short run
The short run is the period in which at least one factor (usually capital) is fixed. Total cost = fixed cost (TFC) + variable cost (TVC).
Average total cost (ATC) = TC ÷ Q; average variable cost (AVC) = TVC ÷ Q; average fixed cost (AFC) = TFC ÷ Q (falls continuously as output rises).
Marginal cost (MC) is the cost of producing one more unit: ΔTC ÷ ΔQ.
Short-run cost curves are U-shaped because of the law of diminishing returns: adding more variable factor to a fixed factor eventually raises marginal cost. MC cuts AVC and ATC at their lowest points.
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