13. Cost Curves

13. Cost Curves - Cost Curves Professor John Diamond ECON...

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Cost Curves Professor John Diamond ECON 370: Microeconomic Theory Lecture 13

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2 Types of Cost Curves: Introduction Total cost curve Variable cost curve Fixed cost curve Average total cost curve Average variable cost curve Average fixed cost curve Marginal cost curve
3 Issues Nature of cost curves How are cost curves related to each other? How are LR and SR cost curves related?

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4 Fixed, Variable and Total Cost Functions F - firm’s fixed cost Total cost of SR fixed inputs Independent of output c v (y) - firm’s variable cost total cost of variable inputs when producing y Varies with level of variable inputs c(y) - firm’s total cost total cost of all inputs, fixed and variable, when producing y ) y ( c F ) y ( c v
5 y \$ F Fixed Cost: Graph

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6 y \$ c v (y) Variable Cost: Graph
7 y \$ F c v (y) c(y) F c y F c y v ( ) ( ) Total Costs: Graph

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8 Avg. Fixed, Variable, Total Cost Curves Total cost function is ) y ( c F ) y ( c v ) y ( AVC ) y ( AFC y ) y ( c y F ) y ( AC v Average (total) cost function is
9 Average fixed cost y F ) y ( AFC Average Fixed Cost Curve “Spreading the overhead” Graph of AFC(y) is a rectangular hyperbola const F AFC(y) y

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10 \$/output unit AFC(y) Y AFC(y) 0 as y Average Fixed Cost Curve: Graph
11 AVC is SR concept with a fixed amount of at least one input, Law of (Eventually) Diminishing Marginal Returns must apply, so AVC will increase eventually Average Variable Cost Curve

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12 \$/output unit AVC(y) y Average Variable Cost Curve: Graph
13 \$/output unit AFC(y) AVC(y) y Avg. Variable and Fixed Cost Curves: Graph

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14 \$/output unit AFC(y) AVC(y) ATC(y) 0 ATC(y) = AFC(y) + AVC(y) Average Total Cost Curve: Graph y
15 AFC(y) = ATC(y) - AVC(y) AFC Average Total Cost Curve: Graph AFC(y) AVC(y) ATC(y) y Since AFC(y) 0 as y , ATC(y) AVC(y) as y

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13. Cost Curves - Cost Curves Professor John Diamond ECON...

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