Chapter 11 - Marginal Cost and Average Cost

ATC = Total cost / Qantity of output (= TC/Q)

Average cost (Average total cost)

= Change in total cost / Change in quantity of output (MC = TC/Q)

Marginal cost = Change in total cost generated by one addtional unit of output

The diminishing returns effect

The larger the output, the greater the amount of variable input required to produce addtional 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.

AVC = VC/Q (average variable cost)

variable cost divided by quantity of output (variable cost per unit of output)

U-shaped average total cost curve (ATC)

falls at low levels of output, then rises at higher levels

AFC = FC/Q (average fixed cost)

fixed cost divided by quantity of output (fixed cost per unit of output)

minimum-cost output (M)

the quantity of output at which average total cost is lowest - the bottom of the U-shaped average total cost curve

average fixed cost curve (AFC)

slopes downward - because of spreading effect

marginal cost curve (MC)

slopes upward - result of diminishing returns that make additional unit of output more costly to produce than the one before

average variable cost curve (AVC)

slpes upward - due to diminsihing returns, but is flatter than the marginal cost curve -> higher cost of additional unit of output is averaged across all units

Marginal costs

tells producer how much one more unit of output costs to produce

Average cost

tells producer how much the average or typical unit of output costs to produce

three general 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 csot is falling. 3. At output greater than the minimum-cost output, marginal cost is greater than average cost and average total cost is rising.