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Costs Curve Shapes Lesson 3

The document provides instructions and answers for a worksheet on cost terms, defining concepts like average cost, marginal cost, total cost, and variable costs. It also includes sample diagrams to illustrate cost curves, showing the average cost, average fixed cost, average variable cost, and marginal cost curves, and explaining how they relate based on the law of diminishing returns. The curves demonstrate that marginal cost is below average cost when costs are falling and above average cost when costs are rising.

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Kene
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21 views13 pages

Costs Curve Shapes Lesson 3

The document provides instructions and answers for a worksheet on cost terms, defining concepts like average cost, marginal cost, total cost, and variable costs. It also includes sample diagrams to illustrate cost curves, showing the average cost, average fixed cost, average variable cost, and marginal cost curves, and explaining how they relate based on the law of diminishing returns. The curves demonstrate that marginal cost is below average cost when costs are falling and above average cost when costs are rising.

Uploaded by

Kene
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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To do

• Print off starter sheet


Starter – key words test 7. Marginal cost (1) -
1. Average cost (1) - ____________________________________________
_____________________________________________ ____________________________________________
___________________________________________ 8. Semi-variable cost (1) -
2. Average fixed cost (1) - ____________________________________________
_____________________________________________ ____________________________________________
___________________________________________ 3. 9. Total cost (1) -
Average variable cost (1) - ____________________________________________
_____________________________________________ ____________________________________________
___________________________________________ 4. 10. Total fixed cost (1) -
Economic cost (1) -
____________________________________________
_____________________________________________
___________________________________________ 5. ____________________________________________
Fixed or indirect or overhead costs (1) - 11. Total variable cost (1) -
_____________________________________________ ____________________________________________
___________________________________________ ____________________________________________
6.Imputed cost (1) - 12. Variable or direct or prime costs (1) -
_____________________________________________ ____________________________________________
___________________________________________ ____________________________________________
Starter – key words test answers 7. Marginal cost - the cost of producing an extra
unit of output.
1. Average cost - the average cost of
production per unit, calculated by dividing
the total cost by the quantity produced. It is 8. Semi-variable cost - a cost which contains within
equal to average variable cost + average it a fixed cost element and a variable cost element.
fixed cost.
9. Total cost - the cost of producing any given level
2. Average fixed cost - total fixed cost
divided by the number of units produced. of output. It is equal to total variable cost + total
fixed cost.
3. Average variable cost - total variable cost
divided by the number of units produced. 10. Total fixed cost - the value of the cost of
4. Economic cost - the opportunity cost of production which
an input to the production process. does not vary however many units are produced.
5. Fixed or indirect or overhead costs -
costs which do not vary as the level of 11. Total variable cost - the overall cost of those
production increases or decreases. factors of production that varies directly with the
6.Imputed cost - an economic cost which a amount produced.
fi rm does not pay for with money to
another firm but is the opportunity cost of 12. Variable or direct or prime costs - costs which
factors of production which the firm itself vary directly in proportion to the level of output of
owns. a firm.
Lesson title: Costs lesson 3

Lesson objective: What do cost curves look like?


Lesson outcomes:

To be able to explain the shape of the AC and MC curves using the law
of diminishing marginal returns
To be able to analyse diagrammatically cost curves
Cost curves – recap Task 1:
Label each curve
Task 2:
Explain the shape of each
curve, including the vertical
distance between the two
curves
The law of diminishing returns - recap
Explain why a firm may experience diminishing returns in the short run
Average costs and marginal cost curves task
On your diagram, label your x axis quantity and label your y axis costs, and draw the following
curves:

AFC – illustrate what shape this curve would look like

AC (ATC) – illustrate what shape this curve would look like

AVC – illustrate what shape this curve would look like

MC – illustrate what shape this curve would look like


Average costs and marginal cost curves task
AC Important points to note:
If the average cost curve is falling, then
the cost of an extra unit of output (MC)
must also be less that AC.
If the average cost is rising then the
marginal cost of one additional unit
must be even higher than AC.
• the average cost curve is above the
marginal cost curve when average cost is
falling
• the average cost curve is below the
marginal cost curve when average cost is
rising;
• average cost and marginal cost are equal
for all levels of output when average cost
is constant; if the average cost curve is
U-shaped, this means that marginal cost
will be equal to and will cut the average
cost curve at its lowest point.
• The same chain of reasoning applies to
the relationship between the average
variable cost curve and the marginal cost
curve.
Stretch:
Where on the diagram does the
law of diminishing returns kick
in?

The lowest point on the MC and


AVC curves show where the law
of diminishing returns kick in
Changes in costs
A change in fixed costs leads to AC shifting

A change in variable costs leads to a change in AC and MC shifting


Practicing cost curves

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