Short run Costs - Economics Video Lecture | Economics for JAMB

in this tutorial I'm going to talk about
cost theory in the short-run this is the
first video in a series of three videos
about cost theory in subsequent videos I
use numbers and calculus as well and I
would encourage you to try to watch all
three videos and the first video this
one here is an introduction I put
quantity on the horizontal axis and
total cost on the vertical axis I draw
in the total cost curve and the total
variable cost curve
lastly up draw in the fixed cost curve
the total cost and total variable costs
are parallel to each other
total cost is equal to total variable
cost plus fixed cost
if I take fixed cost which is that
distance that's the distance between
total cost and total variable cost I'm
going to take the quantity axis the
horizontal axis I'm going to drag that
straight down and now on the vertical
axis I'm going to put unit cost or cost
per unit different than total costs of
course
so cost per unit and I'm gonna draw an
average cost curve looks something like
that the average variable cost curve and
then marginal cost curve and I will
discuss the shape of these curves as
well on what makes some kind of curvy
shapes
first I'm going to talk about average
cost if I pick a quantity and I look at
the total cost for that quantity average
cost is equal to total cost divided by
the quantity at that point in time
now I take that quantity I drag it
straight down so the quantity and this
graph is the same as above and then I
plot average cost which is total cost
divided by quantity it's that point
right there now if I plot all those
points the cost curve drops and then the
cost curve actually goes back up this is
due to diminishing marginal returns it's
probably more correct to say average
total cost or a TC
textbooks but I have a TC like that
professor PI uses that now I'm going to
draw the marginal cost curve promotional
costs to take a quantity and a total
cost and what I want to know is how much
total cost increase if I increase
quantity to do this I take the second
total cost - the first total cost
divided by the second quantity - the
first quantity you probably recognize
that this is the same as the rise over
the run which is equal to slope in other
words I take the change in total cost
divided by the change in quantity is
equal to the marginal cost that little
triangle is change in and it's Greek
Delta this is also equal to the change
in total variable cost divided by the
change in quantity plus the change in
total fixed cost divided by the change
in quantity but the change in fixed cost
is actually zero the slope or the change
in total fixed cost is zero regardless
of the quantity it's fixed
so really the change in total cost is
equal to the change in total variable
cost I'm going to draw these two curves
back in total cost and total variable
cost now if I pick a point and I look at
the slopes of these two lines it turns
out the slope of the total cost and the
slope of the total variable cost are the
same those two lines are parallel the
slopes of these two lines are parallel
all along the curves as you can see
those lines are all parallel so marginal
cost is equal to the change in total
variable cost divided by the change in
quantity as well the requirement now I'm
going to plot the marginal cost so I put
cost per unit on the vertical axis if I
plotted all the points the marginal cost
curve would look something like that
important concept is where the
inflection points are I'll draw in the
average total cost curve and I'm going
to talk about these two curves for a few
minutes through important concept in
this first gray area marginal cost is
less than average total cost the blue
line is below the green line the slope
of that curve is negative in the gray
area and average total cost is
decreasing in that area as well
at the point where marginal cost is
equal to average total cost the slope is
zero just flat line like that and
average total cost is constant now in
this last gray area marginal cost is
greater than average total cost the blue
line is above the green line the slope
is positive and average total cost is
increasing
I'm going to put everything back now
like it belongs now I'm going to talk a
little bit about why the curves have the
shapes that they do draw everything back
the first part of the curve looks gray
area here we have economies of scale now
in the second part of the curve we have
diseconomies of scale a less interesting
curve I'll draw back in is average
variable cost it's the last line I'll
try and write their average variable
cost an average variable cost is this
the total variable cost divided by the
quantity at that point in time may be
nice plot those points this is equal to
average variable cost draw the quantity
down straight down and it turns out that
if I draw in the average fixed cost
curve I get average cost is equal to
average variable cost plus average fixed
cost so the distance between these two
curves is just average fixed cost and
you see the point there so for
industries with low fixed costs or a
fixed cost begin to fall what begins to
happen you see that a fixed costs are
less and less let me just reduce fixed
cost like that you'll see that all the
cost curves come closer together and the
average cost curve and average variable
cost curves become the same line
basically so fixed costs are really low
let me move it down just even more they
average cost and average variable costs
become the same curve to begin with
that's why it's a less interesting line
now if I compare the total variable cost
curve and the total product curve the
total variable cost curve is a
reflection of the total product curve
their reflections of each other I should
this is what gives the curves their
shape let me explain now if I look at
this area that's the same area there and
when I add labour I'll put some labour
in I can add labour at some point in
time increase a lot of quantity which is
that quantity right there I can increase
a lot of quantity because of economies
of scale without increasing cost much
that's why it flattens out but at the
top of the graph there it's the same as
this area over there on the total
variable cost curve and in this case
when I add the same amount of labour as
I did before I get a very small increase
in quantity that little teeny bit right
there and it turns out this little bit
of quantity increase is kind of
expensive especially relative to what I
got before and this is due to
diminishing marginal returns
let me draw in the first quantity in
cost for you see so you can compare
those two
so up next I'm going to do the same type
of deal except I'm going to use numbers
so I would encourage you to watch the
next video actually watch the next two
videos in the playlist