Chapter 22 - Cost Curves

What is the difference between fixed and variable costs?

• Fixed costs are independent of output

• Variable costs are dependent on y

What is total cost function?

c(y) = cv(y) + F

Why do AFC decrease continuously?

Same amount of fixed costs spread over larger output.

Why does AVC increase continuously?

Due to law of diminishing marginal returns, there are decreasing returns for each input added. Fixed factors (if they are present) will eventually constrain the production process.

Explain the intuition behind the U-shape AC curve.

Decline in AFC and increase in AVC

Why may AVC initially decrease at first?

If production is organised in a more efficient way as the scale of output is increased.

What does the marginal cost curve measure?

Change in costs for a given change in output i.e. for any level of y, we can ask how costs will change if we increase output by some amount

What are the key notes concerning MC curve?

MC = AVC at first unit of output

MC passes through min. point of both AC and AVC curves

What does the area under the MC curve represent?

Represents the variable costs

Explain the intuition behind the long-run average cost curve.

• U-shape due to quasi-fixed factors being present in long-run

• In the long-run, firm is free to choose optimal level of fixed factors thus the LRAC curve is just the SRAC curve evaluated at optimal choice of fixed factors

At what point are the long-run and short-run costs the same?

At the optimal output