ECON107
Principles of
Microeconomics
Week 12
NOVEMBER 2013
Chapter-11
1
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Dr. Mazharul Islam
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OUTPUT AND COSTS
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Lesson Objectives
 Examine
what items are included in a
firm’s costs of production.
 Analyze the link between a firm’s
production process and its total costs.
 Learn the meaning of average total
cost and marginal cost and how they
are related.
 Consider the shape of a typical firm’s
cost curves.
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Short-Run Cost
A
firm’s total cost (TC) is the cost
of all resources used. Costs of
production may be divided into
fixed costs and variable costs.
Total fixed cost (TFC) is the cost
of the firm’s fixed inputs. Fixed
costs do not change with
output.
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Short-Run Cost
Total
variable cost (TVC) is the
cost of the firm’s variable inputs.
Variable costs do change with
output.
Total cost equals total fixed cost
plus total variable cost. That is:
TC = TFC + TVC
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Dr. Mazharul Islam
Costs (dollars)
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Combining TVC
With TFC to get
Total Cost
Total
Cost
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TC
TVC
Fixed Cost
Variable Cost
TFC
Quantity
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Figure shows a firm’s total cost curves.
Total fixed cost is the same
at each output level.
Total variable cost
increases as output
increases.
Total cost, which is the sum
of TFC and TVC also
increases as output
increases.
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Short-Run Cost
Total Fixed Costs = Total costs – Total
Variable costs (TFC = TC – TVC)
Average fixed cost (AFC) is total
fixed cost per unit of output.
Total Fixed Costs
Average Fixed Costs (AFC) =
Total Quantity (output)
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Short-Run Cost
Total Variable Costs = Total costs – Total
Variable costs (TVC = TC – TFC)
Average variable cost (AVC) is
total variable cost per unit of
output.
Average Variable Costs (AVC) =
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Total Variable Costs
Total Quantity (output)
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Short-Run Cost
Total Cost = Total Fixed + Variable Costs
Average total cost (ATC) is total cost per
unit of output.
Total Costs
Average Total Cost (ATC) =
Total Quantity (output)
 OR
ATC = AFC + AVC
Marginal Cost (MC) =
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Change in Total Costs
Change in Quantity
Dr. Mazharul Islam
The Various Measures of Cost: Thirsty Thelma’s
Lemonade Stand
Copyright©2004 South-Western
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Short-Run Cost


Figure shows AFC and,
AVCcurves.
The AFC curve shows
that average fixed cost
falls as output increases.
The AVC curve is U-shaped.
As output increases,
average variable cost falls to
a minimum and then
increases.
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Short-Run Cost

The ATC curve is also
U-shaped.
The MC curve is very
special.
The outputs over which AVC
is falling, MC is below AVC.
The outputs over which AVC
is rising, MC is above AVC.
The output at which AVC is at
the minimum, MC equals
AVC.
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Short-Run Cost
Similarly, the outputs over
which ATC is falling, MC is
below ATC.
The outputs over which
ATC is rising, MC is above
ATC.
At the minimum ATC, MC
equals ATC.
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Dr. Mazharul Islam
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Short-Run Cost
Why AVC Curve Is U-Shaped
 The AVC curve is U-shaped because:
 Initially, marginal product exceeds average
product, which brings rising average product
and falling AVC.
 Eventually, marginal product falls below
average product, which brings falling
average product and rising AVC.
 The ATC curve is U-shaped for the same
reasons. In addition, ATC falls at low output
levels because AFC is falling steeply.
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Dr. Mazharul Islam
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Short-Run Cost
Cost Curves and Product Curves
 The
shapes of a firm’s cost curves are
determined by the technology it uses:
 MC is at its minimum at the same output level at
which marginal product is at its maximum.
 When marginal product is rising, marginal cost is
falling.
 AVC is at its minimum at the same output level
at which average product is at its maximum.
 When average product is rising, average
variable cost is falling.
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Dr. Mazharul Islam
Short-Run
Cost

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Figure 11.6 shows these
relationships.
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Short-Run Cost
Shifts in Cost Curves
 The position of a firm’s cost curves depend
on two factors:
 Technology
 Prices of factors of production
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Short-Run Cost
Technology
 Technological
change influences both the
productivity curves and the cost curves.
 An increase in productivity shifts the average
and marginal product curves upward and the
average and marginal cost curves downward.
 If a technological advance brings more capital
and less labor into use, fixed costs increase and
variable costs decrease.
 In this case, average total cost increases at low
output levels and decreases at high output
levels.
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Short-Run Cost
Prices of Factors of Production
 An increase in the price of a factor of
production increases costs and shifts the
cost curves.
 An increase in a fixed cost shifts the total
cost (TC ) and average total cost (ATC )
curves upward but does not shift the
marginal cost (MC ) curve.
 An increase in a variable cost shifts the
total cost (TC ), average total cost (ATC ),
and marginal cost (MC ) curves upward.
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Now it’s over for today. Do you
have any question?
5w/9/2013
Dr. Mazharul Islam