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cost curve deffinitions aec 303

# cost curve deffinitions aec 303 - Cost Curve Deﬁnitions...

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Unformatted text preview: Cost Curve Deﬁnitions Total Variable Costs (TVC) are deﬁned per unit of OUTPUT or y and are the costs that vary with the amount of output (corn) that is to be produced. An illustration would be expenditures on fertilizer. Total FACTOR Costs (T F C) are deﬁned per unit of input or x . The input not the output is on the horizontal axis. Fixed Costs (F C) are costs which DO NOT vary with output, and remain constant whether any output is produced or not TOTAL COSTS (TC) are the sum of Total Variable Costs (TV C)+Total Fixed Costs (F C) Marginal Costs (MC) are the incremental costs of producing an incremental unit of output. Mathematically, the Marginal Cost function is the ﬁrst derivative of either the Total Variable Cost or the Total Cost Function. Since Fixed Costs are constant the derivative of PC is 0, and does not affect MC Since T C= T VC +F C then Marginal Cost (MC) is deﬁned by MC=dTC = dTVC +0 dy dy Average Variable Costs A VC = T VC y Average Costs AC = E y Average Fixed Costs (AFC) = E y Therefore AC = A VC + AFC Total Revenue (TR) = Price of y * y For an individual ﬁrm operating under the assumptions of perfect competition, the price of the output does not vary with the amount of output being produced. Therefore, if Total Revenue is plotted with OUTPUT on the horizontal axis, it has a constant slope and that slope is equal to the price of the product (\$4 corn = 4:1 slope) Marginal Revenue (MR) is the derivative of the Total Revenue (TR) function. If the Total Revenue function has a constant slope (= to the price of the input) then MARGINAL REVENUE plotted with y on the horizontal axis WILL BE A HORIZONTAL LINE at whatever price the output is. Finding the point where MC = MR involves ﬁnding the output level whereby the horizontal MR function intersects a rising MC function. ...
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