1.Fully explain the relationship between various short-term costs and the cost minimization output, specifically that MC=ATC at the lowest point as indicated in the excel sheet and illustrated in the graph showing all the various costs and the cost minimi

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Business Brief

Short run cost is defined as a period when at minimum one of the firm’s input quantities is fixed. This means the period in which at least one of the firm’s input cannot vary. Minimizing the firm’s cost of production is subject to a firm producing a given amount of output (Economic help, 2016). There are always difficulties in identifying the input combination that reduces a firm’s total cost of producing at a level of output and a firm that wants to minimize or reduce its cost of producing a given amount of output is known as a cost-minimizing firm.

Relationship between short-run costs

Fixed cost is the value of fixed inputs; it doest not change with output. The capital cost constitutes the firm’s total fixed cost, the composition of the firm’s cost that is output insensitive. While the sensitive of output varies in terms of total variable cost. For example, the firm’s expenditure on labor goes up or down as the firm produces more or less output. Firm’s labor thus constitutes its total variable cost which is part of the output-sensitive component of the costs. (variable cost changes as labor and output increases or decreases).

In short-run, the total cost is calculated as fixed cost added with variable cost. The total cost also changes as there is an increase in cost components (labor, output, and variable) taking into consideration the constant fixed costs (appendix A and B).In short run cost of production, the average fixed cost can be said to be the division of fixed cost by each level of output. Looking at the appendix, as the output increases the average fixed costs declines.

Average variable cost (AVC) equal to variable cost divided by the level of output at each point in time. Looking at the appendix, at a level of output the AVC declines but at the end, it goes up. This was due to no significant increase in the variable cost, total cost, and the output. Average variable cost declines because the firm spends more on quantity produced. Average cost is the total cost divided by output. The average cost declines as the output increases (the level of output is a major determinant of it average cost). It can also be the sum of average fixed cost and average variable cost (appendix A and C).

Marginal cost measures the increase (or decrease) in total cost if increasing (or decreasing) the output level by one unit. In determining how many units to produce, the most crucial variable is a marginal cost. The change in cost caused by a change in output, derived by dividing the change in total cost by the change in output quantity (appendix A and C).

References