Ch. 22: COST CURVES - Summary - Intermediate Microeconomics - Varian

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