Firm Costs Mod 55

Behind the Supply Curve Firm Costs Fixed + Variable Costs = Total Costs Marginal Costs MC = ∆TC/ ∆Qo

Yay for More Tables! Units of Labor Total Product (# of cups/hr) Variable Cost (VC) Fixed Cost (FC) Total Cost (= +) $0 $50 1 8 $25 $75 2 18 $100 3 26 $125 4 32 $150 5 36 $175 6 38 $200

Behind the Supply Curve Average Total Cost ATC = Total Cost/Q0 Useful figure as it tells the producer how much a typical unit of output costs to produce Can lead to different decisions when deciding to cut costs to increase productivity If MC focuses on the next unit, ATC focuses on ALL units being produced

Behind the Supply Curve

Behind the Supply Curve

Behind the Supply Curve Few unique characteristics of average costs When increasing output, there are two effects that can influence production Diminishing Returns – larger the amount produced, the more variable costs are required, leading to higher variable costs Spreading Effect – Larger the amount produced, the more fixed costs are spread out, leading to lower AFC Minimum Cost Output Bottom of the ATC “U-curve” we see the lowest cost output Important to understand what happens next

Behind the Supply Curve

Behind the Supply Curve