Microeconomics -- Chapter 8 (Part 1): Short-Run Costs and Output Decisions

Shape of Average Fixed Cost Curve

AFC falls as Q rises: The firm is spreading its fixed costs over a larger and larger number of units

What happens when the MC < ATC?

ATC is falling

What happens when MC > ATC?

ATC is rising

Shape of Average Variable Cost Curve

As Q rises, AVC may fall initially; in most cases, AVC will eventually rise as output rises (because of law diminishing returns)

define fixed costs

Fixed cost is any cost that does not depend on the firms' level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.

Shape of Marginal Cost Curve

In the short run, every firm is constrained by some fixed factor of production. A fixed factor implies diminishing returns to labor and a limited capacity to produce. As that limit is approached, marginal costs rise. The marginal cost curve decreases because of cooperation and specialization then increases because of fixed capital and diminishing returns.

define marginal cost

Marginal cost is the increase in total costs that results from producing one more unit of output. Marginal costs reflect changes in variable costs. marginal cost = (change in total cost)/(change in quantity) marginal cost = (change in total variable cost)/(change in quantity)

define spreading overhead

Spreading overhead is the process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises.

Average Total Cost and Marginal Cost

The MC curves crosses the ATC curve at the ATC curve's minimum (same with AVC curve)

define total cost

Total cost is the total fixed cost plus total variable costs. TC = TFC + TVC

Shape of Average Total Cost Curve

Usually, the ATC curve is U-shaped because as Q rises, initially, falling AFC pulls ATC down, eventually AVC pulls ATC up

define variable cost

Variable cost is a cost that depends on the level of production chose. Variable costs are the same as total costs in the long run.

define average fixed costs

average fixed cost is the total fixed cost divided by the number of units of output; a per-unit measure of fixed costs AFC = TFC/q

define average total cost

average total cost equals total cost divided by quantity of output ATC = TC/Q ATC = AFC + AVC

define average variable cost

average variable cost is the total variable cost divided by the number of units of output AVC = TVC/q

define efficient scale

the quantity that minimizes ATC

define total variable cost

total variable cost is the total cost that vary with output in the short run