Ch. 22: COST CURVES

Topics in the chapter

22.1 Average Costs

22.2 Marginal Costs

22.3 Marginal Costs and Variable Costs

22.4 Cost Curves for Online Auctions

22.5 Long-Run Costs

22.6 Discrete Levels of Plant Size

22.7 Long-Run Marginal Costs

The cost curve is an important geometric construction in economics. Cost curves can be used to depict graphically the cost function of a firm and to study the determination of optimal output choices.

Different types of cost curves

(1) Total cost: c(y) = cv(y) + F

cv(y)= variable costs

F= Fixed costs

(2) Average costs: c(y)/y

= +

AC AVC AFC

Average Average Average

costs variabel fixed

costs costs

Example: c(y) = y3- y2 + 4y + 12

(3) Marginal costs: the derivative of the cost curve

dc(y)/dy = dcv(y)/dy

c’(y)

MC is the change in cost due to change in output

MC equals AVC at zero output

MC goes through minimum point of AC and AVC

(4) Area under MC-curve gives the total Variable Costs

cv(y)=

example: MC=y2

Intuitively: MC-curve measures the cost of each

additional unit,

so adding up MCs gives the variable costs.

Long run and short run

(1) Average costs

(2) Marginal costs

Important Points

22.1 Average Costs

1. Average costs are composed of average variable costs plus average fixed

costs. Average fixed costs always decline with output, while average variable

costs tend to increase. The net result is a U-shaped average cost

curve.

22.2 Marginal Costs

2. The marginal cost curve lies below the average cost curve when average

costs are decreasing, and above when they are increasing. Thus marginal

costs must equal average costs at the point of minimum average costs.

3. The area under the marginal cost curve measures the variable costs.

4. The long-run average cost curve is the lower envelope of the short-run

average cost curves

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