1. Firm Costs
Mod 55

2. Behind the Supply Curve
Firm Costs
Fixed + Variable Costs = Total Costs
Marginal Costs
MC = ∆TC/ ∆Qo

3. Yay for More Tables! Units of Labor Total Product (# of cups/hr)
Variable Cost (VC)
Fixed Cost
(FC)
Total Cost
(= +) $0
$50 1 8
$25
$75 2 18
$100 3 26
$125 4 32
$150 5 36
$175 6 38
$200

4. Behind the Supply Curve
Average Total Cost
ATC = Total Cost/Q0
Useful figure as it tells the producer how much a typical unit of output costs to produce
Can lead to different decisions when deciding to cut costs to increase productivity
If MC focuses on the next unit, ATC focuses on ALL units being produced

5. Behind the Supply Curve

6. Behind the Supply Curve

7. Behind the Supply Curve
Few unique characteristics of average costs
When increasing output, there are two effects that can influence production
Diminishing Returns – larger the amount produced, the more variable costs are required, leading to higher variable costs
Spreading Effect – Larger the amount produced, the more fixed costs are spread out, leading to lower AFC
Minimum Cost Output
Bottom of the ATC “U-curve” we see the lowest cost output
Important to understand what happens next

8. Behind the Supply Curve

9. Behind the Supply Curve