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Production Costs and Graph 2

The document discusses various cost concepts in economics, including average cost, average fixed cost, average variable cost, and marginal cost, highlighting their shapes and relationships. It explains how average costs are calculated and how they behave as output changes, particularly focusing on the U-shaped nature of the average total cost curve. Additionally, it emphasizes the impact of diminishing marginal returns on marginal cost and its interaction with average cost.

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20 views18 pages

Production Costs and Graph 2

The document discusses various cost concepts in economics, including average cost, average fixed cost, average variable cost, and marginal cost, highlighting their shapes and relationships. It explains how average costs are calculated and how they behave as output changes, particularly focusing on the U-shaped nature of the average total cost curve. Additionally, it emphasizes the impact of diminishing marginal returns on marginal cost and its interaction with average cost.

Uploaded by

hochoyky
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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GRAPHS- FIXED COST

GRAPHS- TOTAL VARIABLE COST

Question 1

Why does the TVC


take that shape?
GRAPHS
Question 2

Why does the TC


start from that
point?
Notes
GRAPHS- MARGINAL COST
The MC takes this shape

due to diminishing

marginal returns, it

implies that additional units

are more costly to produce.

Initially slopes downward

until it reaches its minimum

point and thereafter, it

starts rising.
Average Cost

 Average cost is the cost per unit of output.

 There are various types of average costs.

 Average total cost / Average cost -AC

 Average fixed Cost- AFC

 Average Variable Cost -AVC


Average Cost

Average cost is the total cost per unit of output.


 It is calculated by dividing total costs by the quantity of output.
 Average Cost = Total Costs / Quantity of Output

AC = TC/ Q

 Example: If your total costs are $15,000 and you produce 1,000 units, then the average cost per
unit would be:
 AC =15,000 / 1,000= $ 15 per unit of output
 The ATC curve is usually U-shaped, reflecting that

average total cost per unit of output usually falls and

then starts to rise as output increases.

 In the short run, the ATC rises because when output

increases, the fixed costs will spread out, but

diminishing returns will set it at a certain point

where the fixed costs cannot spread out any further.


Average fixed Cost

The average fixed cost (AFC) is the total fixed cost (TFC) divided by the units of output (Qx):

AFC = TFC /Qx

Where Qx = Units of output

For example, when the TFC is $50 and the output is 10 units, then the average fixed cost is $50 divided by 10

($50/10) and is equal to $5:

AFC= 50/10
Activity

 Calculate the AFC and interpret your answer.

20 20 20 20 20
1 2 3 4 5
Average fixed Cost

This shows the way in which total fixed

costs are spread out over the amount of

products produced. Therefore, when more

products are manufactured, the AFC will

tend to be smaller.
Average VARIABLE Cost

The AVC curve first falls, reaches its

minimum, and then rises again

continuously.
Average Cost Curves
Key Points
 The average fixed cost curve above is an example of a

rectangular hyperbola. It slopes negatively throughout its length.

 The shape of the average fixed cost curve is explained by the fact

that total fixed cost is a fixed number, as the quantity of output

increases, the amount decreases.

 The average total cost is U-shaped. This is evident from the fact

that the sum AFC and AVC is the ATC.

 The ATC initially falls because both the AFC and the AVC fall.

 After some time, although the AVC starts to rise, the rapidly falling

AFC curve will cause the ATC curve to continue to fall. Finally, the

rising AVC will more than offset the slowly falling AFC, thus

causing the ATC curve to rise again.


Graphs- Marginal Cost

Notes

The MC takes this shape due to diminishing

marginal returns, it implies that additional

units are more costly to produce.

Initially slopes downward until it reaches its

minimum point and thereafter, it starts rising.


Marginal Cost and average The MC curve cuts the ATC curve at the

cost curve ATC's minimum point.

When marginal cost is equal to the average

cost, the average cost is neither rising nor

falling. It is at its minimum.

Then, if marginal cost rises above the

average cost, the average cost is being

pulled up.

It is now plain to see that at the point

where the marginal cost equals the average

cost, this is also the point where the MC

curve cuts the ATC curve from below.


Activity- CALCULATE THE
FOLLOWING
Quantit TFC TVC TC AFC AVC ATC
y of
output
0 20
1 ________ 30

2 ________ ________ 60

3 ________ 65

4 ________ 55
References

CXC Chat

Carlong Economics for CSEC, Karlene Robinson, Novelette Cooke

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