1. Firm Cost

2. To translate information about a firm’s production function into information about its cost, we need to know how much the firm must pay for its inputs.

3. Types of Cost Fixed cost
It is a cost that does not depend on the quantity of output produced. It is the cost of the fixed input.
It is often referred to as an “overhead cost”.

4. Variable cost
It is a cost that depends on the quantity of output produced. It is the cost of the variable input.

5. Total cost
It is the total cost of producing a given quantity of output and is the sum of the fixed and variable cost of producing the quantity of output.
Formula: TC=FC+VC

6. This is illustrated in the total cost curve.
It shows how total cost depends on the quantity of output.
It slopes upward: due to increasing variable cost.
As it rises it also gets steeper.
Or the total cost curve is greater as the amount of output produced increases.

7. Two Key Concepts Marginal Cost
Remember it is the added cost of doing something one more time
In context of production, marginal cost is the change in total cost generated by producing one more unit of output.
Formula: MC= change in total cost/ change in quantity

8. Average Total Cost Often referred to as average cost.
It is the total cost divided by quantity of output produced.
Formula: ATC= total cost/ quantity

9. U-Shaped Total Cost Curves
Falls at low levels of output and then rises at higher levels.
Average fixed cost
It is the fixed cost per unit of output.
AFC= FC/Q
Average variable cost
It is the fixed cost per unit of output
AVC= VC/Q

10. Average fixed cost and average variable cost causes the U-shaped average total cost curve to be u-shaped. They move in opposite directions as output rises.

11. Two opposing effects on average total cost
Spreading effect-
The larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost.
Diminishing returns effect-
The larger the output, the greater amount of variable input required to produce additional units, leading to higher average variable cost.

12. Minimum-cost output
Is the quantity of output at which average total cost is lowest. It corresponds to the bottom of the u-shaped average total cost.

13. 3 General Principles about a Firm’s Marginal Cost and Average Total Cost Curves
At the minimum-cost output, average total cost is equal to marginal cost
At output less than the minimum-cost output, marginal-cost is less than average total cost and average total cost is falling.
And at output greater than the minimum-cost output, marginal cost is greater than average total cost and average total cost is rising.