Cost of Production：.ppt

* * * * * * * * * * * * * * * AVERAGE TOTAL COST CURVE AND ITS SHAPE The average total-cost curve is U-shaped. At very low levels of output average total cost is high because fixed cost is spread over only a few units. Average total cost declines as output increases. Average total cost starts rising because average variable cost rises substantially. The bottom of the U-shaped ATC curve occurs at the quantity that minimizes average total cost. This quantity is sometimes called the efficient scale of the firm. RELATIONSHIP BETWEEN MC AND ATC Relationship between Marginal Cost and Average Total Cost Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising. The marginal-cost curve crosses the average-total-cost curve at the efficient scale. Efficient scale is the quantity that minimizes average total cost. TYPICAL COST CURVES It is now time to examine the relationships that exist between the different measures of cost. FIGURE 6 BIG BOB’S COST CURVES Copyright ? 2004 South-Western (a) Total-Cost Curve $18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 Quantity of Output (bagels per hour) TC 4 2 6 8 14 12 10 2.00 Total Cost 0 FIGURE 6 BIG BOB’S COST CURVES Copyright ? 2004 South-Western (b) Marginal- and Average-Cost Curves Quantity of Output (bagels per hour) Costs $3.00 2.50 2.00 1.50 1.00 0.50 0 4 2 6 8 14 12 10 MC ATC AVC AFC PROPERTIES OF TYPICAL COST CURVES Important Properties of Cost Curves Marginal cost eventually rises with the quantity of output. The average-total-cost curve is U-shaped. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost. The marginal-cost curve crosses the average-variable cost curve at the minimum of average variable cost. COSTS IN THE SHORT RUN AND IN THE LONG RUN For many firms, the division of total costs between fixed and variable costs depends on the time horizon being