Theory of Production and cost

Sunk cost should be ignored opportunity cost is zero

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Sunk cost-Should be ignored; opportunity cost is  zero Fixed versus variable cost Fixed cost versus sunk cost  Marginal and average cost Which cost matters and which  does not?

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Fixed cost(FC)-Not dependent on output Variable cost(VC)-Varies with output Total cost=FC+VC Average fixed cost-Fixed cost per unit of output  (FC/q) Average variable cost-VC/q Average total cost=(FC+VC)/q Marginal cost-Incremental cost:  Δ VC/ Δ q=  Δ TC/ Δ q=w  Δ L/ Δ q=w/MPL Short run costs
The shapes of the cost curves Output Cost A Fixed cost Variable cost Total cost

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The shapes of the cost curves Output Cost AFC MC ATC AVC
Δ VC/ Δ q= w  Δ L/ Δ q=w/MPL If MPL is increasing then marginal cost is decreasing If MPL is decreasing then marginal cost is increasing Diminishing Marginal returns comes into play  VC/q= wL/q=w/APL Relationship between  production and costs

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If MC > ATC, then ATC is rising. If MC = ATC, then ATC is at its low point. If MC < ATC, then ATC is falling. If MC > AVC, then AVC is rising. If MC = AVC, then AVC is at its low point. If MC < AVC, then AVC is falling. Relationship between Average  and Marginal costs
1. Assume that the marginal cost of production is  increasing. Can you determine whether the  average variable cost is increasing or  decreasing? Explain. 2. Assume that the marginal cost of production is  greater than the average variable cost. Can you  determine whether the average variable cost is  increasing or decreasing? Explain.

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