1 / 14

Understanding Average and Marginal Costs in Long-Run Production

This chapter focuses on the concepts of Average Fixed Cost (AFC), Marginal Cost (MC), and Average Variable Cost (AVC) in production economics. It details how to calculate and analyze these costs, with AFC decreasing as output increases, and how the shapes of cost curves indicate efficiency. Economies of scale, diseconomies of scale, and the significance of constant returns to scale are explored, as is the impact of resource prices and technology on cost curves. Understanding these elements is crucial for effective cost management in production.

karlyn
Télécharger la présentation

Understanding Average and Marginal Costs in Long-Run Production

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. More Micro Chapter 20 Costs

  2. Average Fixed cost (AFC) • Divide the total fixed cost by the output (Q) • AFC = TFC/Q • Since fixed costs are constant, AFC must decline as output increases • Referred to as “Spreading the Overhead”

  3. Marginal Cost (MC) • The extra or additional cost of producing 1 more unit of output • MC = change in TC/change in Q

  4. Average variable cost (AVC) • Divide total variable cost by output • TVC/Q • AVC graph is “u” shaped

  5. Average total cost (ATC) • ATC = TC/Q • ATC = TFC/Q + TVC/Q • ATC = AFC + AVC

  6. Long-Run Production Costs Long-Run ATC Curve ATC-1 ATC-5 ATC-2 Long-Run ATC ATC-4 ATC-3 Average Total Costs Output The Long-Run ATC Curve Just “Envelopes” the Short Run ATCs

  7. G 20.1 $200 150 100 Costs 50 0 10 1 2 3 4 5 6 7 8 9 Q Average and Marginal Costs • MC intersects Both ATC and AVC at their min MC AFC ATC AVC AVC AFC

  8. How it Applies • When the amount (MC) added to total cost is less than the current average total cost, ATC will fall • When the marginal cost exceeds ATC, ATC will rise

  9. Shifts of the Cost Curves • Changes in either resource prices or technology will cause costs to change and therefore the cost curves to shift • An increase in technology will shift the ATC curve downwards • An increase in resource prices would shift the curve upwards

  10. Economies of Scale • Economies of Scale-Economies of mass production • Reduced per-unit cost as production increases • Reasons: labor and management specialization, efficient capital, per-unit advertising $$

  11. Diseconomies of Scale • Increases in the average total cost of producing a product as the firm expands the size of its plant in the long run • ***delayed communication, top-heavy company, isolation of decision makers, shirking (avoiding work)

  12. Constant Returns to Scale • Long run average costs do not change

  13. Long-Run Production Costs Alternative Long-Run ATC Shapes Diseconomies Of Scale Constant Returns To Scale Economies Of Scale Average Total Costs Long-Run ATC q1 q2 Output Long-Run ATC Curve Where Economies Of Scale Exist

  14. Sunk Costs • A cost that has already been incurred and can’t be recovered • Marginal Benefit v Marginal Cost • Assuming you can’t resell the good • Don’t cry over spilled milk

More Related