Review Exam 3[1] - Cost of Production Total Fixed Cost cost...

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Cost of Production Total Fixed Cost: cost that does NOT change as output (Q) changes Unavoidable/sunk cost Operating in short run Constant when total output changes Cost associated with creating business, TFC > 0 when Q = 0 TFC > 0 Q = 0 TC > 0 Q = 0 1. Rent 2. Capitol 3. Taxes-Property Taxes 4. salaries 5. Legacy Costs- cost associated with retirees: 1. Guaranteed Pensions 2. Health Care Costs Total Variable Cost : cost that changes as output (Q) changes Avoidable Companies can shut down Variable as total output changes TVC = 0 1. Utilities 2. wages 3. Raw Materials 4. Energy Total Cost: TFC + TVC TFC = TC – TVC TVC = TC - TFC Average Cost Concepts Average Fixed Cost (AFC): TFC / Q Average Variable Cost (AVC): TVC / Q
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Average Total Cost (ATC): TC / Q or AVC + AFC *If you know any two, you can find the third* As AFC goes down , output (Q) goes up Operational Cost Structure: businesses operate in the short run Marginal Cost: *page 549* Change in TC Change in Q When MC = AVC, AVC is a minimum MC < ATC, ATC goes down MC > ATC, ATC goes up MC = ATC, ATC is a minimum When MP goes up , MC goes down When MP goes down , MC goes up When AP goes up , AVC goes down When AP goes down , AVC goes up Long Run Average Cost (LRAC): Everything is variable Fixed costs are zero- they don’t exist Operation size is NOT variable Goal: produce every possible level of output at the lowest possible average cost *minimum ATC for all plants *long run AC for businesses where least possible cost for output Same Shape But for Different Reasons:
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