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

The various measures of cost average total cost cost

This preview shows page 16 - 23 out of 26 pages.

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
Image of page 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
Image of page 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
Image of page 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
Image of page 19
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
Image of page 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
Image of page 21
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
Image of page 22

Subscribe to view the full document.

Image of page 23

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes