Managerial Economics & Business Strategy Chapter 5 The Production Process and Costs.

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Presentation transcript:

Managerial Economics & Business Strategy Chapter 5 The Production Process and Costs

Some Definitions Average Total Cost ATC = AVC + AFC ATC = C(Q)/Q Average Variable Cost AVC = TVC(Q)/Q AVC =ATC-AFC Average Fixed Cost AFC = TFC/Q AFC = ATC-AVC Marginal Cost MC =  C/  Q MC =  TVC/  Q $ Q ATC AVC AFC MC MR

Some things to notice Average-Marginal Rule n When the MC lies below the AVC and ATC the average curves are falling n When the MC lies above the AVC and ATC the average curves are rising n MC intersects the AVC and ATC at their minimum points

A question…. Why does the AVC and ATC grow closer together as we increase Q? n AFC is declining n ATC = AFC + AVC n Area between AVC and ATC is AFC

Total Fixed Cost $ Q ATC AVC MC ATC AVC Q0Q0 AFC Total Fixed Cost Q 0  (ATC-AVC) = Q 0  AFC = Q 0  (TFC/ Q 0 ) = TFC

Total Variable Cost $ Q ATC AVC MC AVC Total Variable Cost Q0Q0 Q 0  AVC = Q 0  [TVC(Q 0 )/ Q 0 ] = TVC(Q 0 )

$ Q ATC AVC MC ATC Total Cost Q0Q0 Q 0  ATC = Q 0  [C(Q 0 )/ Q 0 ] = C(Q 0 ) Total Cost

Cubic Cost Function C(Q) = f + a Q + b Q 2 + cQ 3 Marginal Cost? n Memorize: MC(Q) = a + 2bQ + 3cQ 2 n Calculus: dC/dQ = a + 2bQ + 3cQ 2

An Example n Total Cost: C(Q) = 10 + Q + Q 2 n Variable cost function: TVC(Q) = Q + Q 2 n Variable cost of producing 2 units: TVC(2) = 2 + (2) 2 = 6 n Fixed costs: TFC = 10 n Marginal cost function: MC(Q) = 1 + 2Q n Marginal cost of producing 2 units: MC(2) = 1 + 2(2) = 5

A Firm’s Short Run Costs