The Various Measures of Cost Average total cost Cost of a typical unit of

# The various measures of cost average total cost cost

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The Various Measures of Cost Average total cost Cost of a typical unit of output If total cost is divided evenly over all the units produced Marginal cost Increase in total cost From producing an additional unit of output 16 Subscribe to view the full document.

The Various Measures of Cost Cost curves and their shapes Rising marginal cost Because of diminishing marginal product U-shaped average total cost: ATC = AVC + AFC AFC – always declines as output rises AVC – typically rises as output increases Diminishing marginal product The bottom of the U-shape At quantity that minimizes average total cost 17 The Various Measures of Cost Cost curves and their shapes Efficient scale Quantity of output that minimizes average total cost Relationship between MC and ATC When MC < ATC: average total cost is falling When MC > ATC: average total cost is rising The marginal-cost curve crosses the average-total-cost curve at its minimum 18 Subscribe to view the full document.

Figure Conrad’s average-cost and marginal-cost curves 4 19 Costs 1.25 1.00 0.75 0.50 0.25 2.00 1.75 1.50 2.25 2.50 2.75 3.00 3.25 \$3.50 This figure shows the average total cost (ATC), average fixed cost (AFC), average variable cost (AVC), and marginal cost (MC) for Conrad’s Coffee Shop. All of these curves are obtained by graphing the data in Table 2. These cost curves show three features that are typical of many firms: (1) Marginal cost rises with the quantity of output. (2) The average-total-cost curve is U-shaped. (3) The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost. Quantity of Output (cups of coffee per hour) 0 1 2 3 4 5 6 7 8 9 10 AVC AFC ATC MC The Various Measures of Cost Typical cost curves Marginal cost eventually rises with the quantity of output Average-total-cost curve is U-shaped Marginal-cost curve crosses the average- total-cost curve at the minimum of average total cost 20 Subscribe to view the full document.

Figure Cost curves for a typical firm 5 21 Costs 1.00 0.50 2.00 1.50 2.50 \$3.00 Many firms experience increasing marginal product before diminishing marginal product. As a result, they have cost curves shaped like those in this figure. Notice that marginal cost and average variable cost fall for a while before starting to rise. Quantity of Output 0 2 4 6 8 10 12 14 MC ATC AVC AFC Costs in Short Run and in Long Run Many decisions Fixed in the short run Variable in the long run, Firms – greater flexibility in the long-run Long-run cost curves Differ from short-run cost curves Much flatter than short-run cost curves Short-run cost curves Lie on or above the long-run cost curves 22 Subscribe to view the full document. ### What students are saying

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