Marginal and Average Cost

Marginal and Average Cost - Q, because it is inefficient to...

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1 Marginal and Average Cost 1. Cost. 2. Marginal cost. 3. Average cost. 4. Properties of the AC curve. 5. What shifts cost curves? Firm’s Costs C(Q) = (P 1 xQ 1 ) + (P 2 xQ 2 ) + (P 3 xQ 3 ) + . .. P i = price of input i; Q i = quantity of input i used. C(Q) means: the cost of producing Q units, assuming that the firm is technically efficient, and accounting for the economic cost of inputs. Marginal Cost The marginal cost of the Q th unit sold is: MC(Q) = C(Q) C(Q 1) Marginal cost is the additional cost required to produce the next unit. Average Cost If the firm produces Q units, then the average cost per unit is: AC(Q) = C(Q)/Q Five properties of the AC curve 2. AC usually has negative slope at low

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Unformatted text preview: Q, because it is inefficient to produce small quantities. 1. AC=MC at the first unit of output. 3. AC usually has positive slope at large Q, because it is inefficient to exceed the firm’s current capacity. Five Properties of the AC curve (cont.) 5. If (2) and (3) hold, then AC reaches its minimum where AC=MC. 4. AC has: Negative slope where MC<AC; Positive slope where MC>AC. 2 What Shifts Cost Curves? If technology improves, then cost curves shift downward. If the firm invests in capacity, then its cost curves generally shift downward (at least at high outputs). If input prices fall, then cost curves shift downward....
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This note was uploaded on 04/02/2008 for the course ECON 200 taught by Professor Cramer during the Spring '07 term at University of Arizona- Tucson.

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Marginal and Average Cost - Q, because it is inefficient to...

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