1. A2 Economics Mr. Durham durham.j@shishialevel.cn

2. Lesson Objectives Students should be able to
Illustrate the TC, TVC, and TFC curves, and Discuss describe the reason behind the shapes
Explain the shape of the ATC curve and the MC curve

3. Todays Plan Fixed & Variable Costs The Average Cost Curves
Review & Shape of Curves
The Average Cost Curves
ATC, AVC, & AFC

4. Fixed and Variable Costs
Fixed Cost: a short-run cost that of production that does not change as the quantity of output changes
Variable Cost: a short-run cost of production that changes as output changes.

5. Movie Time
Variable & Fixed Costs

6. Review FC and VC
Jay set up his hot dog stand near the business district. His total variable cost includes the _______.
annual insurance for the hot dog stand
cost of buying the hot dog stand
cost of the hot dogs and condiments
interest he pays on the funds he borrowed to pay for advertising
revenue he gets when he sells his first hot dog each day
Answer: C

7. Review FC and VC
Jay set up his hot dog stand near the business district. His total variable cost includes the _______.
annual insurance for the hot dog stand
cost of buying the hot dog stand
cost of the hot dogs and condiments
interest he pays on the funds he borrowed to pay for advertising
revenue he gets when he sells his first hot dog each day
Answer: C

8. Activity
Given: What you know about Fixed and Variable Costs – (by definition)
Illustrate the following:
TFC Curve
TVC Curve
TC Curve

9. SHORT-RUN COST
Total fixed cost (TFC) is constant—it graphs as a horizontal line.
Total variable cost (TVC) increases as output increases.
Total cost (TC) also increases as output increases.

10. Drawing Activity Explain: The shape of the cost curves
and the distance between the TC and TVC

11. SHORT-RUN COST
The vertical distance between the total cost curve and the total variable cost curve is total fixed cost, as illustrated by the two arrows.

12. SR Costs
Total variable cost (TVC) is the cost of the variable factor of production used by a firm—the cost of labor.
To change its output in the short run, a firm must change the quantity of labor it employs, so total variable cost changes as output changes.
Total cost is the sum of total fixed cost and total variable cost. That is,
TC = TFC + TVC
Table 14.2 on the next slide shows Sam’s Smoothies’ costs.

13. 14.3 SHORT-RUN COST

14. SHORT-RUN COST
Recall: The MP Curve is the shape of an upside down Nike symbol. Can that help explain the rate of change in the Variable Cost.
Take a Minute: Form a description of the relationship between MP and the shape of the TVC Curve

15. Weekend Homework HW: Handout on Production and Costs
Review of Weekend HW

16. MC, ATC, AVC Moving on to Marginal Cost and Average Cost Curves
Point: These are the cost curves to a firm that are used to find the profit maximizing quantity and price.
Meaning these are important to us

17. SHORT-RUN COST Marginal Cost
A firm’s marginal cost is the change in total cost that results from a one-unit increase in total product.
Marginal cost tells us how total cost changes as total product changes.
Table on the next slide calculates marginal cost for Sam’s Smoothies.

19. SHORT-RUN COST Average Cost There are three average cost concepts:
Average fixed cost (AFC) is total fixed cost per unit of output.
Average variable cost (AVC) is total variable cost per unit of output.
Average total cost (ATC) is total cost per unit of output.

20. SHORT-RUN COST
The average cost concepts are calculated from the total cost concepts as follows:
TC = TFC + TVC
Divide each total cost term by the quantity produced, Q, to give
Q Q Q
TC = TFC + TVC
or,
ATC = AFC + AVC

22. SHORT-RUN COST Average fixed cost (AFC) decreases as output increases.
The average variable
cost curve (AVC) is U-shaped.
The average total cost curve (ATC) is also U-shaped.

23. SHORT-RUN COST
Question: What is the vertical distance indicated by the arrows in this diagram?

24. SHORT-RUN COST
The vertical distance between ATC and AVC curves is equal to AFC, as illustrated by the two arrows.
Note: The marginal cost curve (MC) is U-shaped and intersects the average variable cost curve and the average total cost curve at their minimum points.

25. Question Why is the ATC curve U-Shaped?
Tip: Recall that ATC is made up of 2 parts, the AVC and the AFC. They have two opposite effects

26. SHORT-RUN COST Why the Average Total Cost Curve Is U-Shaped
Point1: Average total cost, ATC, is the sum of average fixed cost, AFC, and average variable cost, AVC.
Point 2: The shape of the ATC curve combines the shapes of the AFC and AVC curves.
Point3: The U shape of the average total cost curve arises from the influence of two opposing forces:
Spreading total fixed cost over a larger output
Decreasing marginal returns

27. Module Firm Costs ATC AFC AVC AFC falls as quantity produced increases
Because the TFC is spread out among more units
“the spreading effect”
AVC increases as quantity produced increases
Because of diminishing returns from the variable input
“the diminishing returns effect”
Apply the 2 Effects to the U-Shaped ATC:

28. U Shaped ATC Curve
Divide the ATC into 2 Parts: Downward Sloping and Upward Sloping Part 1: The Spreading Effect outweighs the Diminishing Returns Effect Part 2: The Diminishing Returns Effect outweighs the Spreading Effect

29. Module Firm Costs

30. Review - Firm Costs Key Relationships
When MP is at its peak, then MC must be at its minimum
MC is the mirror image of MP
If MP is rising: them MC is _________
If MP is falling: then MC is _________
When AP is rising: AVC is __________
When AP is falling: AVC is __________
When TP is increasing at an increasing rate, the TC is _______ at a ___________ rate
When TP is increasing at a decreasing rate, the TC is _________ at an __________ rate

31. Review - Firm Costs Key Relationships
When MP is at its peak, then MC must be at its minimum
MC is the mirror image of MP
If MP is rising: them MC is falling
If MP is falling: then MC is rising
When AP is rising: AVC is falling
When AP is falling: AVC is rising
When TP is increasing at an increasing rate, the TC is increasing at a decreasing rate
When TP is increasing at a decreasing rate, the TC is increasing at an increasing rate

32. Homework
HW: Handout on MC and ATC