1. AP Economics Mr. Bernstein Module 55: Firm Costs November 2015

2. AP Economics Mr. Bernstein Cost Curves In the short run, there are variable inputs and at least one fixed input The variable inputs have cost curves Common abbrev.: T – Total, V – Variable, F – Fixed, A – Average and M - Marginal 2

3. AP Economics Mr. Bernstein Cost Curves TC = FC + VC FC are fixed (!) and VC vary with output C is on vertical axis and Q on horizontal axis FC is a horizontal line, even at zero production (Q = 0) VC rises faster as output is increased. The shape of TC curve is the same as the shape of VC curve, staying higher by the amount of FC 3

4. AP Economics Mr. Bernstein Marginal Cost MC is the slope of the TC curve (and the VC curve) MC = ΔTC/ΔQ = Δ(VC + FC)/ΔQ = ΔVC/ΔQ Why does the MC curve initially decline, then eventually rise? Example: Labor. Specialization causes initial decline. Diminishing Returns eventually turn curve upward. Reff: Looks like a Nike swoosh, while ATC curve is U- shaped (or a Smiley face) and AVC curve is a “Smirk” 4

5. AP Economics Mr. Bernstein Average Cost Per-unit costs ATC = TC/Q; AVC = TVC/Q and AFC = TFC/Q And since TC = TFC + TVC, ATC= AFC + AVC Why is the AC curve U-shaped? Initially average costs decline as fixed costs are spread over more units Eventually the effect of Diminishing Returns on variable costs overwhelms the “Spreading effect” 5

6. AP Economics Mr. Bernstein The Relationship between Marginal and Average Costs The MC curve intersects the U-shaped AC and AVC curves at their minimum points AC will fall as long as MC<AC Once MC rises above AC, AC will begin to rise 6