Cost Curves and Their Shapes Cost Efficient Scale MC the quantity of output that minimizes C average tota cost AVc AFC Quantity of Outpu
Cost Curves and Their Shapes Quantity of Output Cost MC ATC AVC AFC Efficient Scale: the quantity of output that minimizes average total cost
Cost in the short run and in the long run Average AtC in short run Total with medium ATC in short run Cost ATC in short fact th lat run with small factory factory A tC in long run 12000 10000 Economies of Diseconomies Constant of scale returns to 10001200 Quantity of Cars per Day
Cost in the Short Run and in the Long Run ATC in short run with small factory ATC in short run with medium factory ATC in short run with large factory ATC in long run Economies of scale Constant returns to scale Diseconomies of scale Quantity of Cars per Day Average Total Cost 1000 1200 12000 10000
Cost in the short run and in the long run the long-run average-total-cost curve is a much flatter U-shape than the short-run average-total cost curve all the short-run curves lie on or above the long-run curve
Cost in the Short Run and in the Long Run • the long-run average-total-cost curve is a much flatter U-shape than the short-run average-totalcost curve. • all the short-run curves lie on or above the long-run curve
Economies and Diseconomies of scale economies of scale the property whereby long-run average total cost falls as the quantity of output increases diseconomies of scale the property whereby long-run average total cost rises as the quantity of output increases constant returns to scale the property whereby long- run average total cost stays the same as the quantity of output changes
Economies and Diseconomies of Scale • economies of scale – the property whereby long-run average total cost falls as the quantity of output increases. • diseconomies of scale – the property whereby long-run average total cost rises as the quantity of output increases. • constant returns to scale – the property whereby long-run average total cost stays the same as the quantity of output changes
● Term Definition Mathematical Description Explicit costs Costs that require an outlay of money by the firm Implicit costs Costs that not require an out lay of money by the firm Fixed costs Cost that do not vary with the FC quantity of output produced Variable costs Cost that do vary with the quantity of vc output pre oduced Total cost The market value of all the inputs TC=FC Vc that a firm uses in production Average fixed cost Fixed costs divided by the quantity of AFC=FC/Q output Average variable cost Variable costs divided by the quantity AVC= VC/Q of output Average total cost Total cost divided by the quantity of ATC= TC/Q output Marginal cost The increase in total cost that arises MC= 4TC/4Q from an extra unit of production
Summery of the Cost Term Definition Mathematical Description Explicit costs Costs that require an outlay of money by the firm -- Implicit costs Costs that not require an outlay of money by the firm -- Fixed costs Cost that do not vary with the quantity of output produced FC Variable costs Cost that do vary with the quantity of output produced VC Total cost The market value of all the inputs that a firm uses in production TC = FC + VC Average fixed cost Fixed costs divided by the quantity of output AFC = FC/Q Average variable cost Variable costs divided by the quantity of output AVC = VC/Q Average total cost Total cost divided by the quantity of output ATC = TC/Q Marginal cost The increase in total cost that arises from an extra unit of production MC= ⊿TC/⊿Q