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    Cost Curves

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    singhanshu21
    1) Short-run cost curves depict costs with at least one fixed input, resulting in diminishing marginal returns. Long-run curves allow all inputs to vary. 2) In the short-run, average total cost initially decreases due to fixed costs spreading out, but eventually increases due to diminishing returns. Marginal cost intersects average variable cost from below at minimum AVC. 3) In the long-run, the firm can adjust all inputs. The long-run total and average total cost curves are the lower envelopes of the respective short-run curves, representing the most efficient production level. The long-run marginal cost curve equals the short-run marginal cost for the chosen level of output.

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    Cost Curves

    Uploaded by

    singhanshu21
    1K views35 pages
    1) Short-run cost curves depict costs with at least one fixed input, resulting in diminishing marginal returns. Long-run curves allow all inputs to vary. 2) In the short-run, average total cost initially decreases due to fixed costs spreading out, but eventually increases due to diminishing returns. Marginal cost intersects average variable cost from below at minimum AVC. 3) In the long-run, the firm can adjust all inputs. The long-run total and average total cost curves are the lower envelopes of the respective short-run curves, representing the most efficient production level. The long-run marginal cost curve equals the short-run marginal cost for the chosen level of output.

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    1) Short-run cost curves depict costs with at least one fixed input, resulting in diminishing marginal returns. Long-run curves allow all inputs to vary. 2) In the short-run, average total cost initially decreases due to fixed costs spreading out, but eventually increases due to diminishing returns. Marginal cost intersects average variable cost from below at minimum AVC. 3) In the long-run, the firm can adjust all inputs. The long-run total and average total cost curves are the lower envelopes of the respective short-run curves, representing the most efficient production level. The long-run marginal cost curve equals the short-run marginal cost for the chosen level of output.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    1K views35 pages

    Cost Curves

    Uploaded by

    singhanshu21
    1) Short-run cost curves depict costs with at least one fixed input, resulting in diminishing marginal returns. Long-run curves allow all inputs to vary. 2) In the short-run, average total cost initially decreases due to fixed costs spreading out, but eventually increases due to diminishing returns. Marginal cost intersects average variable cost from below at minimum AVC. 3) In the long-run, the firm can adjust all inputs. The long-run total and average total cost curves are the lower envelopes of the respective short-run curves, representing the most efficient production level. The long-run marginal cost curve equals the short-run marginal cost for the chosen level of output.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 35

    Short and Long Run

    COST CURVES
    Costs
    Costs
     Total Cost - the sum of all costs incurred
    in production
     TC = FC + VC

     Average Cost – the cost per unit


    of output
     AC = TC/Output

     Marginal Cost – the cost of one more or


    one fewer units of production
     MC = TC – TC
    n n-1 units
    Types of Cost Curves
     A total cost curve is the graph of a
    firm’s total cost function.
     A variable cost curve is the graph of
    a firm’s variable cost function.
     An average total cost curve is the
    graph of a firm’s average total cost
    function.
    Types of Cost Curves
     An average variable cost curve is the
    graph of a firm’s average variable
    cost function.
     An average fixed cost curve is the
    graph of a firm’s average fixed cost
    function.
     A marginal cost curve is the graph of
    a firm’s marginal cost function.
    Types of Cost Curves
     How are these cost curves related to
    each other?
     How are a firm’s long-run and short-
    run cost curves related?
    Fixed, Variable & Total Cost
    Functions
     F is the total cost to a firm of its
    short-run fixed inputs. F, the firm’s
    fixed cost, does not vary with the
    firm’s output level.
     cv(y) is the total cost to a firm of its
    variable inputs when producing y
    output units. cv(y) is the firm’s
    variable cost function.
     cv(y) depends upon the levels of the
    Fixed, Variable & Total Cost
    Functions
     c(y) is the total cost of all inputs,
    fixed and variable, when producing y
    output units. c(y) is the firm’s total
    cost function;
    c( y ) = F + c v ( y ).
    $

    y
    $

    cv(y)

    y
    $

    cv(y)

    y
    $
    c(y)
    cv(y)
    c( y ) = F + c v ( y )

    y
    Av. Fixed, Av. Variable & Av.
    Total Cost Curves

     The firm’s total cost function is


    c( y ) = F + c v ( y ).
    For y > 0, the firm’s average total
    cost function is
    F cv ( y)
    AC( y ) = +
    y y
    = AFC( y ) + AVC( y ).
    Av. Fixed, Av. Variable & Av.
    Total Cost Curves
     What does an average fixed cost
    curve look like? F
    AFC( y ) =
    y
     AFC(y) is a rectangular hyperbola so
    its graph looks like ...
    $/output unit

    AFC(y) → 0 as y → ∞

    AFC(y)

    0 y
    Av. Fixed, Av. Variable & Av.
    Total Cost Curves
     In a short-run with a fixed amount of
    at least one input, the Law of
    Diminishing (Marginal) Returns must
    apply, causing the firm’s average
    variable cost of production to
    increase eventually.
    $/output unit

    AVC(y)

    0 y
    $/output unit

    AVC(y)

    AFC(y)

    0 y
    Av. Fixed, Av. Variable & Av.
    Total Cost Curves

     And ATC(y) = AFC(y) + AVC(y)


    $/output unit

    ATC(y) = AFC(y) + AVC(y)

    ATC(y)

    AVC(y)

    AFC(y)

    0 y
    $/output unit

    AFC(y) = ATC(y) - AVC(y)

    ATC(y)

    AFC AVC(y)

    AFC(y)

    0 y
    $/output unit Since AFC(y) → 0 as y → ∞,
    ATC(y) → AVC(y) as y → ∞.

    ATC(y)

    AFC AVC(y)

    AFC(y)

    0 y
    $/output unit Since AFC(y) → 0 as y → ∞,
    ATC(y) → AVC(y) as y → ∞.
    And since short-run AVC(y) must
    eventually increase, ATC(y) must
    eventually increase in a short-run.

    ATC(y)

    AVC(y)

    AFC(y)

    0 y
    Marginal Cost Function
     Marginal cost is the rate-of-change of
    variable production cost as the
    output level changes. That is,

    ∂ cv ( y)
    MC( y ) = .
    ∂y
    $/output unit

    MC(y)

    AVC(y)

    y
    $/output unit
    ∂ AVC( y )
    MC( y ) = AVC( y ) ⇒ =0
    ∂y
    The short-run MC curve intersects
    the short-run AVC curve from
    MC(y)
    below at the AVC curve’s
    minimum.

    AVC(y)

    y
    $/output unit

    MC(y)

    ATC(y)

    AVC(y)

    y
    Costs
     Short run – Diminishing marginal
    returns results from adding
    successive quantities of variable
    factors to a fixed factor
     Long run – Increases in capacity
    can lead to increasing, decreasing or
    constant returns to scale
    Short-Run & Long-Run Total
    Cost Curves
     The firm’s long-run total cost curve
    consists of the lowest parts of the
    short-run total cost curves. The
    long-run total cost curve is the lower
    envelope of the short-run total cost
    curves.
    Short-Run & Long-Run Average
    Total Cost Curves
     For any output level y, the long-run
    total cost curve always gives the
    lowest possible total production cost.
     Therefore, the long-run av. total cost
    curve must always give the lowest
    possible av. total production cost.
     The long-run av. total cost curve
    must be the lower envelope of all of
    the firm’s short-run av. total cost
    curves.
    Short-Run & Long-Run Marginal
    Cost Curves
     For any output level y > 0, the long-
    run marginal cost of production is
    the marginal cost of production for
    the short-run chosen by the firm.
    $/output unit MCs(y;x2′) MCs(y;x2′′)
    ACs(y;x2′′′)
    ACs(y;x2′)
    ACs(y;x2′′)

    MCs(y;x2′′′)
    MC(y), the long-run marginal
    cost curve.
    y
    Short-Run & Long-Run Marginal
    $/output unit Cost Curves
    SRACs

    AC(y)

    y
    Short-Run & Long-Run Marginal
    $/output unit Cost Curves
    SRMCs

    AC(y)

    y
    Short-Run & Long-Run Marginal
    $/output unit Cost Curves
    SRMCs MC(y)

    AC(y)

    y
    ◆For each y > 0, the long-run MC equals the
    MC for the short-run chosen by the firm.

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