ECN 201: Principles of Microeconomics

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ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-7 Cost Curves

There are three types of costs Total Cost-Lowest total dollar expense needed to produce each level of output. Total Cost= wL+rK Total cost is the summation of fixed cost and variable cost. Total Fixed Cost (TFC) -is the cost of the firm’s fixed factors. Total Variable Cost (TVC) -is the cost of the firm’s variable factors. Marginal Cost (MC) -is the increase in total cost that results from a one-unit increase in output. Average Costs:

Total Cost Curve:

Average and Marginal Cost Average Total Cost-Total Cost/ Total Output Average Fixed Cost-Total Fixed Cost/ Total Output Average Variable Cost-Total Variable Cost/ Total Output Marginal Cost (MC) -is the increase in total cost that results from a one-unit increase in output. (For Calculation Please Refer to the Table Given in Slide 3)

Cost Curves and their Shapes:

The Relationship between Average Cost and Marginal Cost: When marginal cost is less than average cost, average cost is decreasing, and when marginal cost exceeds average cost, average cost is increasing. The Relationship between Short Run Average Cost and Long Run Average Cost:

Economies and Diseconomies of Scale: Economies of Scale: The property whereby the Long run average total cost falls as the quantity of output increases. Diseconomies of Scale: The property whereby the Long run average total cost increases as the quantity of output increases. Constant Returns to Scale: The property whereby the Long run average total cost stays the same as the quantity of output increases.