Intermediate Microeconomics Ch21 notes

Intermediate Microeconomics Ch21 notes - Ch 21. Cost Curves...

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1 Ch 21. Cost Curves Cost curves as a geometric construction of the cost function are important in determining the optimal output. To focus on the relation between costs and output, we write cost function ) , , ( 2 1 * y w w C C = as C(y) from now on. Read this note carefully since part of it goes beyond our textbook. 21.1 Average Costs (AC) The total costs of a firm, C(y), are the sum of the variable costs , C v (y), and the fixed costs , F : F y C y C v + = ) ( ) ( The average cost , AC(y), measures the cost per unit of output, and is the sum of the average variable cost , AVC(y), and the average fixed cost , AFC(y): ) ( ) ( ) ( ) ( ) ( y AFC y AVC y F y y C y y C y AC v + = + = = Curve AFC(y) is obviously downward sloping. Curve AVC(y) may fall initially when production is undergoing economies of scale , but this curve would eventually rise when the capacity of fixed factors is reached so as to constrain the production process. Curve AC(y) will have a U-shape, with its initial decline due to the fall in AFC while its eventual rise due to the rise in AVC dominating the fall in AFC in the later stage of the production process. See figure 21.1 21.2 Marginal Costs (MC) The marginal cost , MC(y), measures the change in costs for a small change in output:
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2 y y C y y C y y C y MC + = = ) ( ) ( ) ( ) ( Since
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Intermediate Microeconomics Ch21 notes - Ch 21. Cost Curves...

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