Transcript chapter 10

CHAPTER
11
Output and Costs
The Firm’s Objectives
and Constraints
 The firm’s main objective is to
maximize economic profits.
 This means they are making the best
(most efficient) use of scarce
resources.
 Firms that try to maximize economic
profits will have the best chance of
surviving in a competitive
environment.
The Firm’s Objective
and Constraints
 The Short Run and the Long Run
 The short run is a period of time in
which the quantity of capital is fixed and
the quantities of the other inputs
(mainly labor) can be varied.
 The long run is a period of time in which
the quantities of all inputs can be
varied.
How Long Is the Long Run?
 In some industries — consulting or
photocopying services — the short
run may last only a month or two.
 In other industries, the short run can
be several years. Electric power
generating and railroads are two
industries that take years to build
new capital.
Short-Run
Technology Constraint
 In order to increase output in the
short-run (holding the capital stock
constant), firms must increase the
quantity of labor.
Short-Run
Technology Constraint
 The effect of a change in the quantity of
labor, holding the capital stock constant,
can be described using three related
concepts:
 Total product is the total output produced.
 Marginal product is the increase in total
product that result from a one-unit increase in
an input.
 Average product is the total product divided by
the quantity of inputs.
Total Product
 Total product (TP) is the total
quantity of output produced with a
given quantity of a fixed input.
 The total product curve shows the
maximum quantity of output that can
be produced with a given amount of
capital as the amount of labor
employed is varied.
The Total Product Curve
 The total product curve is similar to
the production possibilities frontier.
 Both separate attainable output
levels from those that are
unattainable.
 Only points on the total product
curve are technologically efficient.
Total Product Schedule
a
b
c
d
e
f
Labor
0
1
2
3
4
5
Output
0
4
10
13
15
16
Output (sweaters per day)
Total Product Curve
15
10
5
0
1
2
3
4
5
Labor (workers per day)
Output (sweaters per day)
Total Product Curve
15
f
e
d
10
c
5
b
a
0
1
2
3
4
5
Labor (workers per day)
Output (sweaters per day)
Total Product Curve
15
f
e
TP
d
10
c
5
b
a
0
1
2
3
4
5
Labor (workers per day)
Output (sweaters per day)
Total Product Curve
15
f
e
Unattainable
TP
d
10
c
Attainable
5
b
a
0
1
2
3
4
5
Labor (workers per day)
Marginal Product
 The marginal product of an input is
the increase in total product divided
by the increase in the quantity of the
input employed, when the quantity of
all other inputs is constant.
Marginal Product of Labor
 The marginal product of labor (MP) is
the increase in total product divided
by the increase in the quantity of
labor employed, when the quantity of
capital is constant.
 MP= TP/ L
Marginal Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal product
of Labor
-
Marginal Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal product
of Labor
4
Marginal Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal product
of Labor
4
6
Marginal Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal product
of Labor
4
6
3
Marginal Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal product
of Labor
4
6
3
2
Marginal Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal product
of Labor
4
6
3
2
1
Marginal Product Curve
 Marginal product is also measured
by the slope of the total product
curve.
 Increasing marginal returns occur
when the marginal product of an
additional worker exceeds the
marginal product of the previous
worker.
Marginal Product Curve
 Diminishing marginal returns
 Occur when the marginal product of an
additional worker is less than the
marginal product of the previous worker
 Law of diminishing returns
 As a firm uses more of a variable input,
with a given quantity of fixed inputs, the
marginal product of the variable input
eventually diminishes
15
d
13
10
c
5
4
0
1
2
3
TP
Marginal product
(sweaters per day per worker)
Output (sweaters per day)
Marginal Product Curve
6
4
3
2
0
4 5
Labor (workers per day)
1
2
3
4 5
Labor (workers per day)
15
d
13
10
c
5
4
0
1
2
3
TP
Marginal product
(sweaters per day per worker)
Output (sweaters per day)
Marginal Product Curve
6
4
3
2
0
4 5
Labor (workers per day)
1
2
3
4 5
Labor (workers per day)
15
d
13
10
c
5
4
0
1
2
3
TP
Marginal product
(sweaters per day per worker)
Output (sweaters per day)
Marginal Product Curve
6
4
3
2
0
4 5
Labor (workers per day)
1
2
3
4 5
Labor (workers per day)
15
d
13
10
c
5
4
0
1
2
3
TP
Marginal product
(sweaters per day per worker)
Output (sweaters per day)
Marginal Product Curve
The red highlights
the point of
diminishing returns
6
4
3
2
0
4 5
Labor (workers per day)
1
2
3
4 5
Labor (workers per day)
15
d
13
10
c
5
4
0
1
2
3
TP
Marginal product
(sweaters per day per worker)
Output (sweaters per day)
Marginal Product Curve
The red highlights
the point of
diminishing returns
6
4
3
2
0
4 5
Labor (workers per day)
1
2
3
4 5
Labor (workers per day)
15
d
13
10
c
5
4
0
1
2
3
TP
Marginal product
(sweaters per day per worker)
Output (sweaters per day)
Marginal Product Curve
The red highlights
the point of
diminishing returns
6
4
3
2
0
4 5
Labor (workers per day)
1
2
3
4 5
Labor (workers per day)
15
d
13
10
c
5
4
TP
Marginal product
(sweaters per day per worker)
Output (sweaters per day)
Marginal Product Curve
The red highlights
the point of
diminishing returns
6
4
3
2
MP
0
1
2
3
0
4 5
Labor (workers per day)
1
2
3
4 5
Labor (workers per day)
Average Product
 The average product of an input is
equal to total product divided by the
quantity of the input employed.
 Average product tells us how
productive, on average, a factor of
production is.
Average Product of Labor
 The average product of labor is total
product divided by the quantity of
labor employed, when the quantity of
capital is constant.
 AP = TP/L
Average Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal
Product
of Labor
4
6
3
2
1
Average
Product
of Labor
-
Average Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal
Product
of Labor
4
6
3
2
1
Average
Product
of Labor
4
Average Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal
Product
of Labor
4
6
3
2
1
Average
Product
of Labor
4
5
Average Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal
Product
of Labor
4
6
3
2
1
Average
Product
of Labor
4
5
4.33
Average Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal
Product
of Labor
4
6
3
2
1
Average
Product
of Labor
4
5
4.33
3.75
Average Product of Labor
Schedule
Labor
a
b
c
d
e
f
0
1
2
3
4
5
Total Product
0
4
10
13
15
16
Marginal
Product
of Labor
4
6
3
2
1
Average
Product
of Labor
4
5
4.33
3.75
3.20
Average Product Curve
What does the average product
curve look like?
Average product & Marginal product
(sweaters per day per worker)
Average Product Curve
6
4.33
4
3
2
0
1
2
3
4 5
Labor (workers per day)
Average product & Marginal product
(sweaters per day per worker)
Average Product Curve
6
c
d
4.33
4
e
b
f
3
2
0
1
2
3
4 5
Labor (workers per day)
Average product & Marginal product
(sweaters per day per worker)
Average Product Curve
6
c
d
4.33
4
e
b
3
f
AP
2
0
1
2
3
4 5
Labor (workers per day)
Average product & Marginal product
(sweaters per day per worker)
Average Product Curve
Maximum
average
product
6
c
d
4.33
4
e
b
3
f
AP
2
MP
0
1
2
3
4 5
Labor (workers per day)
The Relationship Between
Marginal and Average
 When marginal product is above
average product, average is rising
— marginal is pulling average up.
 When marginal product is below
average product, average is falling
— marginal is pulling average down.
 Marginal product intersects average
where average is at its maximum.
Marginal and Average Grade
 The marginal grade is the grade you
receive in this class.
 Your average grade is your G.P.A.
(grade point average).
 If the grade you get in this class is
higher than your G.P.A., it will pull
your G.P.A. up.
 If, on the other hand, ...
The Shapes of the
Product Curves
 Total, marginal, and average product
curves for different goods will still
have similar shapes because almost
every production process
incorporates two features:
 Increasing marginal returns initially
 Diminishing marginal returns eventually
Increasing Marginal Returns
 Increasing marginal returns occur
when the marginal product of an
additional worker exceeds the
marginal product of the previous
worker.
 Increasing marginal returns will
usually be the rule when the quantity
of labor employed is low.
Diminishing Marginal
Returns
 Diminishing marginal returns occur
when the marginal product of an
additional worker is less than the
marginal product of the previous
worker.
 All production processes eventually
reach a point of diminishing marginal
returns.
The Law of
Diminishing Returns
 As a firm uses more of a variable
input, with a given quantity of fixed
inputs, the marginal product of the
variable input eventually diminishes.
 Because marginal product eventually
diminishes, so does average
product.
Short-Run Cost
 To produce more output in the short
run, a firm must employ more labor.
 This will also increase its cost.
 To produce more output, a firm must
increase its costs.
Short-Run Cost
 Total cost (TC) is the cost of all
productive resources used by a firm.
 Total fixed cost (TFC) is the cost of
all the firm’s fixed inputs.
 Total variable cost (TVC) is the cost
of all the firm’s variable inputs.
Total Cost
 A firm’s total cost is the sum of the
costs of all the inputs it uses in
production.
 Total cost includes the cost of
renting land, buildings and
equipment; wages paid to the work
force; and normal profit.
Total Fixed Cost and
Total Variable Cost
 Total cost (TC) is divided into two
categories:
 Total fixed cost (TFC)
 Total variable cost (TVC)
 TC = TFC + TVC
Total Fixed Cost
 A fixed cost is the cost of a fixed
input.
 Fixed cost doesn’t change when
output changes.
 Total fixed cost is the total cost of
the fixed inputs.
Total Variable Cost
 A variable cost is a cost of a variable
input.
 Variable costs change when the level
of output changes.
 Total variable cost is the total cost of
the variable inputs.
Total Cost Schedule
Labor
Output
(workers (sweaters
per day) per day)
a
0
0
b
1
4
c
2
10
d
3
13
e
4
15
f
5
16
Total
fixed
cost
(TFC)
Total
variable
cost
(TVC)
(dollars per day)
Total
cost
(TC)
Total Cost Schedules
Labor
Output
Total
fixed
cost
(TFC)
(workers (sweaters
per day) per day)
Total
variable
cost
(TVC)
(dollars per day)
a
0
0
25
b
1
4
25
c
2
10
25
d
3
13
25
e
4
15
25
f
5
16
25
Total
cost
(TC)
Total Cost Schedules
Labor
Output
Total
fixed
cost
(TFC)
(workers (sweaters
per day) per day)
Total
variable
cost
(TVC)
(dollars per day)
a
0
0
25
0
b
1
4
25
25
c
2
10
25
50
d
3
13
25
75
e
4
15
25
100
f
5
16
25
125
Total
cost
(TC)
Total Cost Schedules
Labor
Output
Total
fixed
cost
(TFC)
(workers (sweaters
per day) per day)
Total
variable
cost
(TVC)
Total
cost
(TC)
(dollars per day)
a
0
0
25
0
25
b
1
4
25
25
50
c
2
10
25
50
75
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
Cost (dollars per day)
Total Cost Curves
150
100
50
0
5
10
15
Output (sweaters per day)
Cost (dollars per day)
Total Cost Curves
150
100
50
TFC
0
5
10
15
Output (sweaters per day)
Cost (dollars per day)
Total Cost Curves
150
TVC
100
50
TFC
0
5
10
15
Output (sweaters per day)
Cost (dollars per day)
Total Cost Curves
TC
150
TVC
100
50
TFC
0
5
10
15
Output (sweaters per day)
Marginal Cost
 Marginal cost (MC) is the increase in
its total cost divided by the increase
in its output.
 Marginal cost is the increase in total
cost that results from a one unit
increase in output.
 MC = TC/ Q
Marginal Cost
 Because fixed costs don’t change as
output changes, marginal cost is
also the increase in total variable
cost divided by the increase in
output.
 MC
= TC/ Q
MC
= TVC/ Q + TFC/ Q
MC
= TVC/ Q +
0
Marginal Cost
 Marginal costs decrease at low
outputs because of the gains from
specialization, but it eventually
increases due to the law of
diminishing returns.
Average Cost
 Average cost is the cost per unit of
output.
 There are three average costs:
 Average fixed cost
 Average variable cost
 Average total cost
Average Cost
 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.
Average Cost Measures
 Average total cost (ATC) is total cost
per unit of output. It is the sum of
average fixed cost (AFC) and average
variable cost (AVC).
Average Cost
Total Cost = TC = TFC + TVC
Average Total Cost = ATC
TC TFC TVC
=
+
Q
Q
Q
ATC = AFC+AVC
OR
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
a
0
0
25
0
25
b
1
4
25
25
50
c
2
10
25
50
75
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
$/day
$/day
$/day
$/day
-
-
-
-
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
c
2
10
25
50
75
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
c
2
10
25
50
75
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
6.25
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
c
2
10
25
50
75
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
6.25
6.25
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
c
2
10
25
50
75
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
6.25
6.25
12.50
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
c
2
10
25
50
75
4.17
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
6.25
6.25
12.50
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
c
2
10
25
50
75
4.17
2.50
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
6.25
12.50
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
c
2
10
25
50
75
4.17
2.50
5.00
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
12.50
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
e
4
15
25
100
125
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
e
4
15
25
100
125
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
e
4
15
25
100
125
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
e
4
15
25
100
125
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
12.50
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
12.50
1.67
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
12.50
1.67
6.67
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
12.50
1.67
6.67
8.33
f
5
16
25
125
150
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
12.50
1.67
6.67
8.33
f
5
16
25
125
150
25.00
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
12.50
1.67
6.67
8.33
f
5
16
25
125
150
25.00
1.56
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
12.50
1.67
6.67
8.33
f
5
16
25
125
150
25.00
1.56
7.81
Marginal Cost and Average Costs
Total
fixed
Labor Output cost
L
Q
(TFC)
Total
variable Total
cost
cost
(TVC)
(TC)
Average Average Average
Marginal fixed
variable Total
cost
cost
cost
cost
(MC)
(AFC)
(AVC)
(ATC)
(workers (sweaters
per day)
per day) $/day
$/day
$/day
$/day
$/day
$/day
$/day
-
-
-
a
0
0
25
0
25
-
b
1
4
25
25
50
6.25
6.25
6.25
12.50
c
2
10
25
50
75
4.17
2.50
5.00
7.50
d
3
13
25
75
100
8.33
1.92
5.77
7.69
e
4
15
25
100
125
12.50
1.67
6.67
8.33
f
5
16
25
125
150
25.00
1.56
7.81
9.38
Cost (dollars per sweater)
Marginal Cost and Average
Costs
15
10
5
0
5
10
15
Output (sweaters per day)
Cost (dollars per sweater)
Marginal Cost and Average
Costs
15
10
5
AFC
0
5
10
15
Output (sweaters per day)
Cost (dollars per sweater)
Marginal Cost and Average
Costs
15
10
AVC
5
AFC
0
5
10
15
Output (sweaters per day)
Cost (dollars per sweater)
Marginal Cost and Average
Costs
15
ATC = AFC + AVC
ATC
AVC
10
5
AFC
0
5
10
15
Output (sweaters per day)
Cost (dollars per sweater)
Marginal Cost and Average
Costs
15
ATC = AFC + AVC
MC
ATC
AVC
10
5
AFC
0
5
10
15
Output (sweaters per day)
Cost (dollars per sweater)
Marginal Cost and Average
Costs
15
ATC = AFC + AVC
MC
ATC
AVC
10
5
Minimum points
AFC
0
5
10
15
Output (sweaters per day)
Short-Run Cost Curves
 Total fixed cost is constant.
 Total variable cost and total cost both
increase with output.
 Average fixed cost slopes downward.
 The average total cost and average
variable cost curves are U-shaped.
 The marginal cost curve is also U-shaped.
 The MC curve intersects the ATC and AVC
at their respective minimums.
Why the Average Total Cost
Curve is U-Shaped
 There are two opposing forces that
guarantee the short-run average total
cost curve will be U-shaped:
 Decreasing average fixed cost
 Eventually increasing average variable
cost caused by diminishing returns
 The shape of the ATC curve
combines these two effects.
Cost Curves and
Product Curves
 There are two factors that determine
a firm’s cost curves:
 Its technology
 Its product curves
 Marginal product and marginal cost
move in opposite directions.
 Average product and average cost
move in opposite directions, too.
Shifts in the Cost Curves
 The position of a firm’s short-run
cost curves depend on technology
and the prices it pays for inputs.
 If technology changes or if factor
prices change, the firm’s costs
change and its cost curves shift.
Technological Change and
Shifting Cost Curves
 A technological change that
increases productivity shifts the
product curves upward and shifts the
cost curves downward.
Changes in Factor Prices
and Shifting Cost Curves
 An increase in factor prices
increases costs and shifts the cost
curves upward.
 Changes in fixed cost only affect the
fixed and total cost curves.
 Changes in variable cost shifts the
variable, total, and marginal cost
curves.
Cost Curves and Product
Curves
How are the product curves
related to the cost curves?
Cost and Product Curves
Average and Marginal Product and Cost
The firm’s cost curves and product
curves are linked:
 MC is at its minimum at the same output
level at which MP is at its maximum.
 When MP is rising, MC is falling.
 AVC is at its minimum at the same
output level at which AP is at its maximum.
 When AP is rising, AVC is falling.
Cost and Product
Curves
This figure (11.7
in the text)
shows these
relationships.