1. Production Costs

2. Fixed, Variable, and Total Costs
To maximize our profits, we must distinguish between different types of costs we incur.
Fixed Costs: Do not change as we increase output.
Variable Costs: Increases or decreases with changes in output, and management decisions.
Total Costs: The sum of fixed and variable.

3. Fixed and Variable Costs Video

4. Table 8-2
What happens to TFC as we increase production? What could these fixed costs be?
What happens to TVC? What could they be?
How are TFC and TVC related to TC?
What happens to AFC as we increase production? Why?
What happens to AVC? Diminishing Returns?
What happens to ATC? MC?

5. As Equations AFC = TFC / Q AVC = TVC/Q ATC = AFC + AVC
MC = Change in TC / Change in Q

6. Marginal Decisions
Marginal Cost represents the additional costs incurred to make the last unit of output.
Decisions should always be made at the margin.
To maximize profit, we need to know whether or not we want to make more or less units.
If Revenue from one more unit exceeds the Marginal Cost, we should make more.

7. Graphical Portrayal of Costs
Figure 8-5 Quick Quiz
The MC curve intersects the ATC and AVC curves at their lowest points. Why?
Though marginal cost is initially falling, it starts to increase dramatically, lifting Average Total Costs.
Video on Cost Curves

8. MC and MP are Related Marginal Cost and Marginal Product are related.
They are mirrors of each other.
Read “MC and Marginal Product” and examine Figure 8-6.

9. Shifts of Cost Curves
Changes in resource prices or technology will cause costs to change and therefore the associated curves to shift.
If labour prices or variable inputs are more expensive, ATC, AVC, and MC would shift upward. AFC would not.
If rent increased, a fixed input, ATC and AFC would shift upward, AVC and MC would not.

10. Possible Test Questions
Page 211
Questions (6,8,9)