Transcript Managerial Economics & Business Strategy

Managerial Economics &
Business Strategy
Chapter 5
The Production Process and Costs
Some Definitions
Average Total Cost
ATC = AVC + AFC
ATC = C(Q)/Q
Average Variable Cost
AVC = TVC(Q)/Q
AVC =ATC-AFC
Average Fixed Cost
AFC = TFC/Q
AFC = ATC-AVC
Marginal Cost
MC = DTC/DQ
MC = DTVC/DQ
$
MC
ATC
AVC
MR
AFC
Q
Some things to notice
• Average-Marginal Rule
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When the MC lies below the AVC and ATC the average curves are
falling
When the MC lies above the AVC and ATC the average curves are
rising
MC intersects the AVC and ATC at their minimum points
A question….
• Why does the AVC and ATC grow closer together as
we increase Q?
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AFC is declining
ATC = AFC + AVC
Area between AVC and ATC is AFC
Total Fixed Cost
Q0(ATC-AVC)
$
= Q0 AFC
= Q0(TFC/ Q0)
MC
ATC
AVC
= TFC
ATC
AFC
AVC
Total Fixed
Cost
Q0
Q
Total Variable Cost
$
Q0AVC
= Q0[TVC(Q0)/ Q0]
= TVC(Q0)
AVC
MC
ATC
AVC
Total Variable
Cost
Q0
Q
Total Cost
Q0ATC
$
= Q0[C(Q0)/ Q0]
= C(Q0)
MC
ATC
AVC
ATC
Total Cost
Q0
Q
Cubic Cost Function
• C(Q) = f + a Q + b Q2 + cQ3
• Marginal Cost?
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Memorize:
MC(Q) = a + 2bQ + 3cQ2
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Calculus:
dC/dQ = a + 2bQ + 3cQ2
An Example
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Total Cost: C(Q) = 10 + Q + Q2
Variable cost function:
TVC(Q) = Q + Q2
Variable cost of producing 2 units:
TVC(2) = 2 + (2)2 = 6
Fixed costs:
TFC = 10
Marginal cost function:
MC(Q) = 1 + 2Q
Marginal cost of producing 2 units:
MC(2) = 1 + 2(2) = 5
A Firm’s Short Run Costs
A Firm’s Short Run Costs