Figure 9-2Figure 9-3 is a graphical representation of the data in the grid.
Figure 9-3The Short-Run Costs of Production
We just examined the effects of diminishing marginal returns. Now let’s look at the costs of these inputs. We know that
in the short run some resources are fixed while others are variable. With this knowledge, we can safely conclude that
short-run costs can be both fixed and variable depending on the resource. Let’s focus on three types of costs:
■ Fixed costs:Costs that do not vary with changes in output. An example of a fixed cost is the rent a firm has to
pay for factory space. The rent does not fluctuate each time a firm increases or decreases its output. The rent is
an independent cost of production. Costs that do not depend on output are fixed costs.
■ Variable costs:Costs that change with the level of output. Variable costs are the opposite of fixed costs in that
they fluctuate with the production levels. If output rises, then variable costs rise as well. When there is a decrease
in output, typically there will be a decrease in variable costs. Variable costs include power, fuel, payments for
materials, and most labor. Remember that variable costs do not rise or fall in the same increments as output levels.
As production begins, variable costs increase by decreasing amounts, but as production continues, variable costs
increase by increasing amounts.025507512345678910Donut StoreQuantity of LaborTotal ProductTotal ProductLabor Units
0 1 2 3 4 5 6 7 8 9Total Product
0
10
20
35
50
60
65
65
60
52Average Product
—
10
10
11.66
12.50
12.00
10.83
9.28
7.50
5.77Marginal Product10
10
15
15
10
5
0
-5
-8Part III: Microeconomics