Chapter 13 Cont. - The Various Measures of Cost PDF

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Lecture Notes Chapter #13 Part II...

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The Various Measures of Cost o Fixed and Variable Costs  Fixed Costs  Costs that do not vary with the quantty of output produced  Variable Costs  Costs that vary with the quantty of output produced  Total Cost = Fixed Cost + Variable Cost o Average and Marginal Cost  Average Total Cost (ATC)  Total cost divided by the quantty of output  Average Total Cost = Total Cost / Quantty  ATC = AVC + AFC  Cost of a typical unit of output o If total cost is divided evenly over all the units produced  Average Fixed Cost (AFC)  Fixed cost divided by the quantty of output  Average Variable Cost (AVC)  Variable cost divided by the quantty of output  Marginal Cost (MC)

 The increase in total cost that arises from an extra unit of producton  Marginal Cost = Change in Total Cost / Change in Quantty  Increase in total cost o From producing an additonal unit of output o Cost Curves and Their Shapes  Rising Marginal Cost  Marginal cost rises with the quantty of output produced o Because of diminishing marginal product  U-Shaped Average Total Cost  ATC = AVC + AFC  AFC -> Always declines as output rises o Because the fixed cost is spread over a large number of units  AVC -> Typically rises as output increases o Because of diminishing marginal product  The tug-of-war between AFC & AVC generates the U-shape in ATC  The botom of the U-shape occurs at the quantty that minimizes ATC  Efcient Scale o The quantty of output that minimizes ATC  The Relatonship between Marginal Cost and Average Total Cost

 When MC < ATC: ATC is falling  When MC > ATC: ATC is rising  The MC curve crosses ATC curve at its minimum o Typical Cost Curves  Marginal Cost eventually rises with the quantty of output  The ATC is U-shaped  The MC curve crosses the ATC curve at the minimum of ATC  Costs in the Short Run and in the Long Run o The Relatonship between Short-run and Long-Run Average Total Cost  Many decisions  Fixed in the short-run  Variable in the long-run  Firms – greater fexibility in the long-run  Long-run Cost Curves o Differ from short-run cost curves o Much fater than short-run cost curves  Short-run cost curves o Lie on or above the long-run cost curves o Economies and Diseconomies of Scale

 Economies of Scale  The property whereby long-run ATC falls as the quantty of output increases (increasing specializaton)  Diseconomies of Scale  The property whereby long-run ATC rises as the quantty of output increases (increasing coordinaton problems)  Constant Returns to Scale  The property whereby long-run ATC stays the same as the quantty of output changes...