Marginal Cost and Average Costs

· Marginal cost (MC) is the increase in total cost that results from a one-unit increase in output. The MC curve is U-shaped.

· Average fixed cost (AFC) is total fixed cost per unit of output. The value of AFC falls as output increases.

· Average variable cost (AVC) is total variable costs per unit of output. At low levels of output, AVC falls as output increases but at higher levels of output, AVC rises as output increases.

· Average total cost (ATC) is the total cost per unit of output. ATC = AFC + AVC. At low levels of output, ATC falls as output increases but at higher levels of output, ATC rises as output increases.

48. Marginal Cost and Average Costs

• Marginal cost (MC) is the increase in total cost that results from a one-unit increase in output. The MC curve is U-shaped.
• Average fixed cost (AFC) is total fixed cost per unit of output. The value of AFC falls as output increases.
• Average variable cost (AVC) is total variable costs per unit of output. At low levels of output, AVC falls as output increases but at higher levels of output, AVC rises as output increases.
• Average total cost (ATC) is the total cost per unit of output. ATC = AFC + AVC. At low levels of output, ATC falls as output increases but at higher levels of output, ATC rises as output increases.
• The figure illustrates typical MC, AFC, AVC, and ATC curves. As the figure shows, the MC curve, the AVC curve, and the ATC curve are all U-shaped. There are other additional important points about this figure:

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· The vertical distance between the AVC curve and the ATC curve is the AFC. Because the AFC decreases as output increases, these curves become vertically closer to each other as output increases.

· The MC curve intersects the AVC curve and ATC curve at their minimums.

• The shape of the cost curves is related to the shape of the productivity curves.

· The shape of the AVC curve is determined by the shape of the AP curve. Over the range of output for which the AP curve is rising, the AVC curve is falling and over the range of output for which the AP curve is falling, the AVC curve is rising.

· The shape of the MC curve is determined by the shape of the MP curve. Over the range of output for which the MP curve is rising, the MC curve is falling and over the range of output for which the MP curve is falling, the MC curve is rising.

• The cost curves shift with changes in technology or changes in prices of factors of production.

· An increase in technology that allows more output to be produced from the same resources shifts the

· cost curves downward. If the technology requires more capital, a fixed input, then the average total cost curve shifts upward at low levels of output and downward at higher levels of output.

• A fall in the price of the fixed factor shifts the AFC and ATC curves downward but leaves the AVC and MC curves unchanged. A fall in the price of a variable factor shifts the AVC, ATC, and MC curves downward but leaves the AFC curve unchanged.

49. Long-Run Cost

In the long run, a firm can vary the level of all resources so both labor and capital are variable factors. As a result, in the long run all costs are variable costs.

Production Function

· The production function determines the behavior of long run costs.

· A firm’s production function typically exhibits diminishing returns to capital as well as diminishing returns to labor. The marginal product of capital is the change in total product divided by the change in capital when the quantity of labor is held constant. Holding constant the quantity of employment, after some level of output the firm will have diminishing returns to capital—the marginal product of capital decreases as more capital is used.

Date: 2015-12-11; view: 1240