Cost Curve Model Chapter 13 completion. Costs of Production Fixed costs - do not change with...
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Cost Curve Model Chapter 13 completion
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pasta Shape of MC Curve Shape of MC curve is determined by shape of MP Curve If MP ↑ => MC ↓ If MP ↓ => MC ↑ MC
Transcript of Cost Curve Model Chapter 13 completion. Costs of Production Fixed costs - do not change with...
Cost Curve ModelChapter 13 completion
Costs of Production• Fixed costs - do not change with quantity of output
• Variable costs - ↑ with quantity of output
• Marginal cost ∆ total cost to make 1 extra unit
Fixed Costs + Variable Costs = Total Costs
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Shape of MC Curve
Shape of MC curve is determined by shape of MP Curve
If MP ↑ => MC ↓
If MP ↓ => MC ↑
MC
Model:•uses average cost curves:•uses economic costs
ATC = TC / Qty producedAVC = TVC / Qty producedAFC = TFC / Qty produced
Cost Curve Model
Cost Curves
Using Average Cost Curves
Quantity of Output
Costs
$3.00
2.50
2.00
1.50
1.00
0.50
0 42 6 8 141210
MC
ATC
AVC
AFC
MC hits both ATC & AVC at their minimum
•When MC < ATC => average total cost is falling
•When MC > ATC => average total cost is rising
AFC always declines:
Fixed Costs spread over more output
ATC is U-shaped
Due to high fixed costs
1) Profit = TR – TC
There are several formulas to calculate economic profit:
2) Profit = (Price – ATC) X Qty (most useful formula)
Market Price = P1
If P1 > ATC => Economic Profit
If P1 < ATC => Economic Loss
Cost Curves
Quantity0
Price
MCMC ATCATC
Economies of Scale• Economies of scale = Qty ↑ => ATC ↓
– ATC falls as output increases– Allows for specialization of workers– Leads to more productivity per worker
• Diseconomies of scale = Qty ↑ => ATC ↑ – ATC rises as output increases– coordination problems eventually arise as firms grow in size
• Constant returns to scale- – Qty ↑ => ATC stays the same
Practice Test
Short Run vs. Long Run Costs
• Costs depends on the time horizon considered– In the short run, some costs are fixed– In the long run, all fixed costs become variable costs– Why: Firms have time to change both plant size & labor force
• Therefore, long-run cost curves differ from short-run cost curves
Long Run ATC
Quantity ofCars per Day
0
AverageTotalCost
1,200
$12,000
1,000
10,000
Economiesof
scale Diseconomiesof
scale
Constantreturns to
scale
LRATC
Note! => The “term” economies of scale applies only to long run cost curves
Long Run vs. Short Run ATC• LRATC is always below or on short run ATC curve
– you can be more efficient in long run!
Quantity ofCars per Day
0
AverageTotalCost
1,200
$12,000
1,200
$12,000
1,000
10,000
1,000
10,000
1,000
10,000
Economiesof
scale
Economiesof
scale
Economiesof
scale
Short run ATC
small factory
Short run ATC
small factory
Short run ATC
medium factory
Short run ATC
medium factory
Short run ATC
large factory
Short run ATC
large factory
Diseconomiesof
scale
Diseconomiesof
scale
Diseconomiesof
scale
Constantreturns to
scale
Constantreturns to
scale
LRATC
