7.4 Costs in the Short Run

We now shift our attention from production to costs. The majority of
firms cannot influence the prices of the inputs that they use; instead, they
must pay the going market price for their inputs. For example, an
electronic game maker in Montreal, a petrochemicals producer in Sarnia,
a rancher in Red Deer, and a boat builder in Prince Rupert are each too
small a part of the total demand for the factors that they use to be able to
influence their prices significantly. The firms must pay the going rent for
the land they need, the going wage rate for the labour they employ, and
the going interest rate that banks charge for loans; so it is with most other
firms. Given these prices and the physical returns summarized by the
product curves (as in Figure 7-1 ), the costs of producing different levels
of output can be calculated.

Defining Short Run Costs

Several different types of costs are relevant in the short run, and we must
be careful to get them straight. They are all related to the product
concepts we have just discussed.

Total Cost (TC)

Total cost is the sum of all costs that the firm incurs to produce a given
level of output. Total cost is divided into two parts: total fixed cost and

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