Module 22

average fixed cost (AFC)

(fixed cost) divided by the (quantity of output), also known as the fixed cost per unit of output AVERAGE FIXED COST FALLS AS MORE OUTPUT IS PRODUCED BECAUSE THE NUMERATOR (FIXED COST) IS A FIXED NUMBER BUT THE DENOMINATOR (QUANTITY OF OUTPUT) INCREASES AS MORE IS PRODUCED.. In other words, as more output is produced, the fixed cost is spread over more units of output.

Average variable cost (AVC)

(variable cost) divided by the (quantity of output), also known as the variable cost per unit of output AVERAGE VARIABLE COST RISES AS OUTPUT INCREASES. This reflects diminishing returns to the variable input:: each additional unit of output adds more to variable cost than the previous unit because increasing amounts of variable input are required to make another unit.

Features of various cost curves

- marginal cost slopes upward (the result of diminishing returns that make an additional unit of output more costly to produce than the one before - average variable cost slopes upward, but is FLATTER than the marginal cost curve. - average fixed cost slopes downward because of the spreading effect

Three principles that are always true about a firm's marginal cost and average total cost curves

1) at the minimum-cost output, average total cost is EQUAL to marginal cost 2) At output less than the minimum-cost output, marginal cost is LESS THAN average total cost and average total cost is falling 3) At output greater than the minimum-cost output, marginal cost is GREATER than average total cost and average total cost is rising

The following is true about marginal costs

1) marginal cost is the change in total cost generated by one additional unit of output 2) marginal cost is the change in variable cost 3) the marginal cost curve must cross the minimum of the average total cost curve

What kind of shape does a realistic marginal cost curve have?

A "swoosh" shape (see Figure 22-6)

variable cost

A cost that depends on the quantity of output produced. It is the cost of the variable input. For example, labor is a variable cost because if you hire more workers, your labor costs will increase.

fixed cost

A cost that does not depend on the quantity of output produced, so whether you manufacture 10 units of 1 million units, you pay the same price, e.g. building rent. It is the cost of the fixed input. Generally referred to as OVERHEAD COST in business

Average variable cost equals:

Average variable cost = average total cost minus average fixed cost

the diminishing returns effect

The larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost

the spreading effect

The larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost.

When a firm is producing zero output, total cost equals?

fixed cost

Average Total Cost

is the (total cost) divided by the (quantity of output produced); that is, it is equal to total cost per unit of output It is important because it tells the producer how much the average or typical unit of output costs to produce.

marginal cost

the added cost of doing something one more time. The change in total cost generated by producing ONE MORE unit of output. Formula: (Change in total cost) divided by (Change in quantity of output) So just as MARGINAL PRODUCT is equal to the slope of the total PEODUCT curve, MARGINAL COST is equal to the slope of the total COST curve

minimum-cost output

the quantity of output that corresponds to the minimum average total cost

total cost of producing a given quantity of output

the sum of the fixed cost and the variable cost of producing that quantity of output