1. What Cost Look Like & How They Determine How Much a Firm Will Supply
Costs of Production
What Cost Look Like
&
How They Determine How Much a Firm Will Supply

2. 3 The Total-Cost curve Total Cost 5.00 4.00 3.00 2.00 1.00 8.00 7.00
6.00
9.00
10.00
11.00
12.00
13.00
14.00
$15.00
Total-cost curve
Quantity of Output
(cups of coffee per hour) 1 2 3 4 5 6 7 8 9 10
Here the quantity of output produced (on the horizontal axis) is from the first column in Table 2, and the total cost (on the vertical axis) is from the second column. As in Figure 2, the total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product.

3. The Various Measures of Cost
Fixed costs (short-run) (capital, e.g., rent/leased space)
Do not vary with the quantity of output produced
Variable costs (short and long-run) (e.g. labor and materials)
Vary with the quantity of output produced
Average fixed cost (AFC) – decline throughout
Fixed cost divided by the quantity of output
Average variable cost (AVC) – “U-shaped”
Variable cost divided by the quantity of output

4. The Various Measures of Cost
Average total cost = Total Costs(Q) ÷Q
Cost of a typical unit of output
Average Fixed Costs = Total Fixed Costs ÷ Q
ATC = TC / Q
Average Variable Costs = Total Var Costs ÷ Q
AVC = TVC/Q
Marginal cost = ΔTC(Q+1 – Q)/ΔQ or MC = ΔTC / ΔQ
Change in total cost from producing an 1 more unit of output

5. EXHIBIT 5.3 The Cost Curves
5-5

6. The Various Measures of Cost
Cost curves and their shapes
U-shaped average total cost: ATC = AVC + AFC
AFC – always declines as output rises
AVC – typically rises as output increases
Diminishing marginal product
At the minimum of ATC or AVC
The bottom (lowest point) of the U-shaped curve
MC = min(ATC) and MC = min(AVC)

7.  FIGURE 9.2 Short-Run Supply Curve of a Perfectly Competitive Firm
At prices below average variable cost, it pays a firm to shut down rather than continue operating.
Thus, the short-run supply curve of a competitive firm is the part of its marginal cost curve that lies above its average variable cost curve.

8. The Various Measures of Cost
Cost curves and their shapes
Efficient scale
Quantity of output that minimizes average total cost
Relationship between MC and ATC
When MC < ATC: average total cost is falling
When MC > ATC: average total cost is rising
The marginal-cost curve crosses the average-total-cost curve at its minimum

9. Average total cost in the short and long runs6
Average total cost in the short and long runs
Average
Total
Cost
ATC in short
run with
small factory
ATC in short
run with
medium factory
ATC in short
run with
large factory
ATC in long run
Economies
of scale
Diseconomies
of scale
$12,000
1,200
10,000
Constant returns to scale
1,000
Quantity of Cars per Day
Because fixed costs are variable in the long run, the average-total-cost curve in the short run differs from the average-total-cost curve in the long run.

10. Costs in Short Run and in Long Run
Many decisions
Some inputs are fixed(unalterable), like Kapital in the short run
All inputs are variable in the long run,
Firms – greater flexibility in the long-run
Long-run cost curves
Differ from short-run cost curves
Much flatter than short-run cost curves
Short-run cost curves – e.g., different sized factories (or Kapital)
Lie on or above the long-run cost curves