1. Cost Curve Model
Chapter 13 completion

2. 3 Costs of Production Total Costs = Fixed Costs + Variable Costs
Fixed costs - do not change with quantity of output
Fixed costs are SUNK!
Variable costs - ↑ with quantity of output
Marginal cost ∆ total cost to make 1 extra unit
Total Costs = Fixed Costs + Variable Costs

3. Cost Curve Model Model: uses average cost curves: uses economic costs
ATC = TC / Qty produced
AVC = TVC / Qty produced
AFC = TFC / Qty produced

4. There are several formulas to calculate economic profit:
1) Profit = TR – TC
Cost Curves
2) Profit = (Price – ATC) X Qty
(most useful formula)
Market Price = P1
If P1 > ATC => Economic Profit
If P1 < ATC => Economic Loss

5. Shape of MC Curve Shape of MC curve is determined by shape of MP Curve
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Shape of MC curve is determined by shape of MP Curve
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If MP ↑ => MC ↓
If MP ↓ => MC ↑
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6. Using Average Cost Curves
MC hits both ATC & AVC at their minimum
Costs
When MC < ATC => average total cost is falling
When MC > ATC => average total cost is rising
$3.00
2.50 MC
ATC
AVC
AFC
ATC is U-shaped
Due to high fixed costs
2.00
1.50
1.00
AFC always declines:
Fixed Costs spread over more output
0.50 2 4 6 8 10 12 14
Quantity of Output

7. Economies of Scale Economies of scale = Qty ↑ => ATC ↓
ATC falls as output increases
Allows for specialization of workers
Leads to more productivity (MP) per worker
Diseconomies of scale = Qty ↑ => ATC ↑
ATC rises as output increases
coordination problems eventually arise as firms grow in size
Constant returns to scale-
Qty ↑ => ATC stays the same

8. Short Run vs. Long Run Costs
Costs depends on time horizon considered
In the short run, some costs are fixed
In the long run, all fixed costs become variable costs
Why? => Firms have time to change both plant size & labor force
Therefore, long-run cost curves differ from short-run cost curves
Minimum of long run ATC is always at or below short run ATC

9. Long Run vs. Short Run ATC
LRATC is always at or below short run ATC curve
you can be more efficient in long run!