M ORE M ICRO C HAPTER 20 Costs. A VERAGE F IXED COST (AFC) Divide the total fixed cost by the output (Q) AFC = TFC/Q Since fixed costs are constant, AFC.

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Presentation transcript:

M ORE M ICRO C HAPTER 20 Costs

A VERAGE F IXED COST (AFC) Divide the total fixed cost by the output (Q) AFC = TFC/Q Since fixed costs are constant, AFC must decline as output increases Referred to as “Spreading the Overhead”

M ARGINAL C OST (MC) The extra or additional cost of producing 1 more unit of output MC = change in TC/change in Q

A VERAGE VARIABLE COST (AVC) Divide total variable cost by output TVC/Q AVC graph is “u” shaped

A VERAGE TOTAL COST (ATC) ATC = TC/Q ATC = TFC/Q + TVC/Q ATC = AFC + AVC

L ONG -R UN P RODUCTION C OSTS Long-Run ATC Curve Long-Run ATC Average Total Costs ATC-1 ATC-2 ATC-3 ATC-4 ATC-5 Output The Long-Run ATC Curve Just “Envelopes” the Short Run ATCs

MC intersects Both ATC and AVC at their min Average and Marginal Costs Costs Q $200 AFC MC ATC AVC AFC G 20.1

H OW IT A PPLIES When the amount (MC) added to total cost is less than the current average total cost, ATC will fall When the marginal cost exceeds ATC, ATC will rise

S HIFTS OF THE C OST C URVES Changes in either resource prices or technology will cause costs to change and therefore the cost curves to shift An increase in technology will shift the ATC curve downwards An increase in resource prices would shift the curve upwards

E CONOMIES OF S CALE Economies of Scale-Economies of mass production Reduced per-unit cost as production increases Reasons: labor and management specialization, efficient capital, per-unit advertising $$

D ISECONOMIES OF S CALE Increases in the average total cost of producing a product as the firm expands the size of its plant in the long run ***delayed communication, top-heavy company, isolation of decision makers, shirking (avoiding work)

C ONSTANT R ETURNS TO S CALE Long run average costs do not change

L ONG -R UN P RODUCTION C OSTS Alternative Long-Run ATC Shapes Output Long-Run ATC Curve Where Economies Of Scale Exist Average Total Costs Long-Run ATC Economies Of Scale Constant Returns To Scale Diseconomies Of Scale q1q1 q2q2

S UNK C OSTS A cost that has already been incurred and can’t be recovered Marginal Benefit v Marginal Cost Assuming you can’t resell the good Don’t cry over spilled milk