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Ecos Presentation

The document discusses key concepts in cost analysis, including variable and fixed costs, total costs, average costs, and marginal costs. It explains how to calculate these costs and describes the shapes of related cost curves. Additionally, it provides examples and references to various economic texts for further reading.

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12 views7 pages

Ecos Presentation

The document discusses key concepts in cost analysis, including variable and fixed costs, total costs, average costs, and marginal costs. It explains how to calculate these costs and describes the shapes of related cost curves. Additionally, it provides examples and references to various economic texts for further reading.

Uploaded by

Tstorm
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Midlands State University

NAME REG.NO
Everjoy F Masarira R245650B
Annah S Z Shoko R2410598R
Shingai Mutore R246589X
Rutendo Chivandire R249033A
Rutendo Kadzomba R246246J
Romeo T Maringire R243888P
Tadiwanashe Sangarwe R245328J
Valecia Chapeta R247796Q
Percy Mlambo R249303F
Zimiso Moyo R241059R
Thelma Tagarira R245949Z
Ndanatsiwa Muchokwa R246883G
Lotania A Masamvu R204436B
This write up will be focusing on the following topics;
- Variable vs fixed costs
- Calculation of total costs, average variable cost, average total cost and marginal cost
- Shapes of cost curves ( variable cost, fixed cost, average variable cost, average total cost
marginal cost)

Total cost
Varian (2017) assert that the total cost of producing a product includes the market value
of all the resources used in production. Simply identify all the resources used in
production determine their value and add up everything.
The market value of all resources used to produce a good or service.

Fixed costs
In the short run some costs don’t increase. The cost of production don’t change when the
rate of output is altered e.g equipment, cost of plant, rent

Variable cost
Costs that change when the rate of production is altered for example raw materials,
utilities ( electricity and water bills)

Marginal cost
An increase in total cost resulting from producing another unit of output.
MC = change in total cost
Change in quantity
Average total cost
According to Brealy, Myers and Allen (2017),variable cost divided by the quantity of
output produced.
AVC = variable cost or AVC+AFC
Quantity
Average fixed cost
Fixed cost divided by quantity of output produced.
AFC = Fixed Costs
quantity
Examples of calculations: According to Katz and Rosen (2017)
A company produces handmade chairs. The total cost of producing 10 chairs is $1000
The variable cost of producing the chairs is $650. If the company increases production to
11 chairs, the total cost rises to $1080. The company produced a total of 100 chairs.
Calculate
a) fixed costs
b) average variable costs
c) average total costs
d) marginal cost

Answers:
Fixed costs = total costs – variable costs
$1000 - $650
$350
Average variable cost = variable cost
Quantity
650
10
$65
Average total cost = total cost
Quantity
1000
10
$100
Marginal cost = TC(11 chairs) – TC(10 chairs)
$1080 - $1000
$80
Change in quantity of chairs = 11-10=1
MC = 80
1
$80

The cost curves: According to Henderson and Quandt (2017) & Mankiw (2017)
The marginal cost curve has the following characteristics which lead to its shape:
- initial decline; the MC often decreases initially due to economies of scale
- minimum point; MC reaches a minimum point, where the marginal cost is at its lowest
- increasing MC; after the minimum point MC starts to rise, due to diminishing returns.
- Rising MC; as output increases, MC continues to rise, showing that each additional
output becomes more expensive to produce.

The total cost curve can be explained by the following stages.


- The total cost curve declines initially; due to economies of scale, division of labour
(increasing returns)
- TC curve becomes linear and flat due to no changes in costs and optimal resource
utilization (constant returns)
- TC curve increases due to over utilization of resources, inefficient production processes.
(diminishing returns)
- TC curve increases sharply due to: high resource costs and significant in efficiencies

The average cost curve has a distinctive ‘U’ shaped curve with the following
characteristics.
- AC increases as output decreases due to economies of scale
- AC reaches a minimum point were AC is at its lowest
- AC increases as output increases beyond the minimum point due to diminishing returns
The average variable cost curve has the following description
- As output increases from zero the AVC declines due to spreading fixed costs over larger
output
- The AVC reaches a minimum point, where AVC is at its lowest
- Beyond the minimum point, the AVC rises due to increased costs of production

Variable and Fixed costs


- Variable costs increase as output increases
- VC is zero when output is zero
- VC curve is linear or slightly curved
- Fixed costs remains constant at all output levels
- FC is the same when output is zero
- FC curve is a horizontal line
References

Brealey, R., Myers, S., & Allen, F. (2017). Principles of Corporate Finance. 13th ed.
New York: McGraw-Hill Education.

Henderson, J., & Quandt, R. (2017). Microeconomic Theory: A Mathematical Approach.


4th ed. New York: McGraw-Hill Education.

Katz, M., & Rosen, H. (2017). Microeconomics. 8th ed. New York: McGraw-Hill
Education.

Mankiw, G. (2017). Principles of Microeconomics. 8th ed. Boston: Cengage Learning.

Varian, H. (2017). Intermediate Microeconomics: A Modern Approach. 9th ed. New


York: W.W. Norton & Company.

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