Ch21 - Chapter Twenty-One Cost Curves Types of Cost Curves...

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Chapter Twenty-One Cost Curves
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Types of Cost Curves A total cost curve is the graph of a firm’s total cost function. A variable cost curve is the graph of a firm’s variable cost function. An average total cost curve is the graph of a firm’s average total cost function.
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Types of Cost Curves An average variable cost curve is the graph of a firm’s average variable cost function. An average fixed cost curve is the graph of a firm’s average fixed cost function. A marginal cost curve is the graph of a firm’s marginal cost function.
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Types of Cost Curves How are these cost curves related to each other? How are a firm’s long-run and short- run cost curves related?
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F is the total cost to a firm of its short- run fixed inputs. F, the firm’s fixed cost, does not vary with the firm’s output level. c v (y) is the total cost to a firm of its variable inputs when producing y output units. c v (y) is the firm’s variable cost function. c v (y) depends upon the levels of the fixed inputs.
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c(y) is the total cost of all inputs, fixed and variable, when producing y output units. c(y) is the firm’s total cost function; c y F c y v ( ) ( ). = +
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y $ F
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y $ c v (y)
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y $ F c v (y)
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y $ F c v (y) c(y) F c y F c y v ( ) ( ) = +
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Av. Fixed, Av. Variable & Av. Total Cost Curves The firm’s total cost function is For y > 0, the firm’s average total cost function is c y F c y v ( ) ( ). = + AC y F y c y y AFC y AVC y v ( ) ( ) ( ) ( ). = + = +
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Av. Fixed, Av. Variable & Av. Total Cost Curves What does an average fixed cost curve look like? AFC(y) is a rectangular hyperbola so its graph looks like . .. AFC y F y ( ) =
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$/output unit AFC(y) y 0 AFC(y) 0 as y → ∞
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Av. Fixed, Av. Variable & Av. Total Cost Curves In a short-run with a fixed amount of at least one input, the Law of Diminishing (Marginal) Returns must apply, causing the firm’s average variable cost of production to increase eventually.
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$/output unit AVC(y) y 0
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$/output unit AFC(y) AVC(y) y 0
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Av. Fixed, Av. Variable & Av. Total Cost Curves And ATC(y) = AFC(y) + AVC(y)
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$/output unit AFC(y) AVC(y) ATC(y) y 0 ATC(y) = AFC(y) + AVC(y)
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$/output unit AFC(y) AVC(y) ATC(y) y 0 AFC(y) = ATC(y) - AVC(y) AFC
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$/output unit AFC(y) AVC(y) ATC(y) y 0 Since AFC(y) 0 as y → ∞ , ATC(y) AVC(y) as y → ∞. AFC
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$/output unit AFC(y) AVC(y) ATC(y) y 0 Since AFC(y) 0 as y → ∞ , ATC(y) AVC(y) as y → ∞. And since short-run AVC(y) must eventually increase, ATC(y) must eventually increase in a short-run.
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Marginal Cost Function Marginal cost is the rate-of-change of variable production cost as the output level changes. That is, MC y c y y v ( ) ( ) . =
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The firm’s total cost function is and the fixed cost F does not change with the output level y, so MC is the slope of both the variable cost and the total cost functions. c y
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This note was uploaded on 01/06/2012 for the course ECON 102 taught by Professor Goodhart during the Spring '11 term at Abu Dhabi University.

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Ch21 - Chapter Twenty-One Cost Curves Types of Cost Curves...

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