Behind the Supply Curve:
Inputs and Costs
Changes in the prices of key commodities can have a significant impact on a compa-
ny’s bottom line. According to a September 27, 2007, article in the
“Now, with oil, gas and electricity prices soaring, companies are beginning to
realize that saving energy can translate into dramatically lower costs.” Another
article, dated September 9, 2007, states, “Higher grain prices are taking
an increasing financial toll.” Energy is an input into virtually all types of production;
corn is an input into the production of beef, chicken, high-fructose corn syrup, and
ethanol (the gasoline substitute fuel).
Explain how the cost of energy can be both a fixed cost and a variable cost for a
Suppose energy is a fixed cost and energy prices rise. What happens to the compa-
ny’s average total cost curve? What happens to its marginal cost curve? Illustrate
your answer with a diagram.
Explain why the cost of corn is a variable cost but not a fixed cost for an ethanol
When the cost of corn goes up, what happens to the average total cost curve of an
ethanol producer? What happens to its marginal cost curve? Illustrate your answer
with a diagram.
Energy required to keep a company operating regardless of how much output is
produced represents a fixed cost, such as the energy costs of operating office
buildings, factories, and stores that must be maintained independent of the
amount of output produced. In addition, energy is a variable cost because produc-
ing more output almost always requires using more energy.
When fixed costs increase, so will average total costs. The average total cost curve
will shift upward. In panel (a) of the accompanying diagram, this is illustrated by
the movement of the average total cost curve from its initial position,
, to its
. The marginal cost curve is not affected if the variable costs do
not change. So the marginal cost curve remains at its initial position,
(b) A Rise in the Price of Corn
(a) A Rise in the Price of Energy