Figure 7-3 An Increase in Variable Factor Prices
Shifts in Short-Run Cost Curves
Remember that a firm’s short-run cost curves are drawn holding two
things constant. First, the amount of the fixed factor used by the firm is
held constant (indeed, it is the existence of such a fixed factor that
ensures we are in the short run). Second, factor prices—the price per unit
of labour and the price per unit of capital—are held constant. How would
changes in factor prices and in the amount of the fixed factor affect the
firm’s short-run cost curves?
Changes in Factor Prices
Factor prices change frequently, sometimes dramatically, and such
changes naturally affect firms’ costs. Consider a change in the wage, the
price of a unit of labour services. An increase in the wage increases
variable costs, leaves fixed costs unaffected, and therefore increases the
firm’s total costs. Since marginal costs are always marginal variable costs,
such a change will also increase the firm’s marginal costs. An increase in
the price of the variable factor will therefore cause an upward shift in the
firm’s ATC and MC curves, as shown in Figure 7-3.