TC TVC TFC TC = TVC + TFC Output ( Q ) TFC TVC TC 12 1 10 22 2 16 28 3 12 1 10 22 2 16 28 3 21 33 4 40 5 52 6 60 72 7 91 103 TC TVC Cost TFC Output

Introductory Economics Lecture 16

Cost Curves Cost Output TC TVC TFC m Animate 1) TFC ////////////////////2) TVC ///////////////3), TC m TFC Output

TC = TFC + TVC Output (Q) TFC TVC TC 12 1 10 22 2 16 28 3 21 33 4 40 5 52 6 60 72 7 91 103

Output (Q) TFC TVC TC AFC =TFC Q AVC =TVC AC = TC 12 1 10 22 2 16 28 6 8 14 3 21 33 4 7 11 40 5 52 2.4 10.4 60 72 91 103 1.7 13 14.7

Variable and Fixed Costs

Average cost curves Cost Output AC AVC AFC Animate 1) AFC ////////////////////2) AVC ///////////////3), AC AFC Output

Inputs Output Col1 Col2 Col3 Col4 Capital Labor Total physical product (TPP) Col3 Marginal physical product (MPP) Col3a Average physical product (APP) Col3b 5 1 100 2 250 150 125 3 400 133 4 500 560 60 112 TFC C1 x 60 Col4 300

Inputs Output Total costs Capital C1 Labor C2 (TPP) C3 TFC C1 x 60 C4 TVC C2 x 100 C5 TC C4 + C5 C6 5 1 100 300 400 2 250 200 500 3 600 4 700 560 800

Inputs Col1 Col2 0.67 0.67 1 1.67 Capital Labor 5 1 2 3 4 Average costs Marginal cost AFC C4 ÷ C3 Col7 AVC C5 ÷ C3 Col8 AC C6 ÷ C3 Col9 MC ∆C6 ÷ ∆C3 Col10 3.00 1.00 4.00   1.20 0.80 2.00 0.75 1.50 0.60 1.40 0.54 0.89 1.43 0.67 0.67 1 1.67

Average and marginal cost curves MC AC 1.4 Q O 500

Average and marginal physical product curves APP MPP 133 APP MPP L O 3

Average and marginal cost curves MC AC 1.4 Q O 500

Long run cost curves Costs Costs O Costs O Output Output O Output LRTC LRAC LRTC LRAC O Costs O Output Output Diseconomies of scale Economies of scale LRTC Animate Red curves one by one 1) Eco of scale 2) dis eco of scale 2) constant LRAC O Output Constant Cost

Initial economies of scale then LTC Costs Costs LRAC LRMC LRAC O O Output Output Diseconomies of scale Economies of scale Costs Costs LRMC LTC LAVC LAVC O O Output Output Initial economies of scale then diseconomies of scale Constant Cost

(a) Economies of scale Costs LRAC LRMC O Output Economies of scale

(b) Diseconomies of scale LRMC Costs LRAC O Output Diseconomies of scale

(c) Constant Costs Costs LRAC = LRMC O Output Constant costs

(d) Initially economies of scale then diseconomies of scale Costs LRMC LAVC O Output Initially economies of scale then diseconomies of scale