Short-Run Cost Minimization

To:             Krzysztof Koj, Instructor

From:    Ahmed Abdelkafy, Student

Date:            February 10, 2017.        

                                      Business Brief(Short-Run Cost Minimization)

Introduction

At any given time any firm tends to minimize the cost of its production at a given amount of output. To better understand the facts and graphs here are some definitions and information that will provide help (www.econ.unavarra.es, 2017). Fixed costs are costs that are not affected by the outputs; examples are such as equipment and rent. Variable costs are costs that are affected by the outputs; examples are such as labor and raw materials. The total cost is the addition of these fixed and variable costs. Average fixed costs are found by dividing total fixed costs by output. Average variable costs are found by dividing total variable costs by output. Average total costs are found by dividing total costs by output, and it's also called unit cost. Marginal cost is the cost of producing one extra unit of output.  It can be found by calculating the change in total cost when output is increased by one unit (Economics for managers, 2005).

Analysis

After research and analyzing the data provided we can agree with the concepts given by this source (www.economicsonline.co.uk, 2017) where we can find that there are costs that cannot be changed at any time which are the fixed costs, and there are variable costs and average variable costs that change and increase gradually as the output increases in sync with the labor which are the variables in the whole organization. Average fixed costs are decreasing, unlike the fixed costs because the fixed costs remain unchanged with the increase in outputs which is one of the factors in calculating the average fixed costs. There is an important relationship between the average total cost and the marginal cost because they are derived from the same basic numerical cost data. The relationship between them is that the average total cost is always cut from below by the marginal cost as seen in the graph, also when the average total cost is above the marginal cost the average total cost will be falling and when the average total cost is below the marginal cost the average total cost will be rising, and finally the maximum productivity of the firm is at the lowest average total cost or where the average total cost equals the marginal costs. Marginal costs are only affected by variable costs and are unaffected by changes in fixed costs. Also we can find that the total cost is only affected by variable costs, and are unaffected by changes in fixed costs, so we can conclude that the marginal cost is affected by the total cost.