Module 9.3 Average Costs Lecture

Average Total Costs (ATC)

• Definition: Average Total Cost is calculated by dividing total cost by the quantity produced.

  • Formula: ATC = \frac{Total\ Cost}{Quantity}

• Calculation Examples:

  • For 10 units: Total Cost = $90, Average Cost = \frac{90}{10} = 9

  • For 20 units: Total Cost = $110, Average Cost = \frac{110}{20} = 5.50

  • For 30 units: Total Cost = $126, Average Cost = \frac{126}{30} = 4.20

  • For 40 units: Average Cost = $3.60

  • For 50 units: Average Cost = $3.32

  • For 60 units: Average Cost = $3.20

  • For 70 units: Average Cost = $3.20

  • For 80 units: Average Cost = $3.30

  • For 90 units: Average Cost = $3.60

  • For 100 units: Average Cost = $4.04

• Graph Representation:

  • The graph of Average Total Cost starts high at $9, decreases progressively reaching the lowest at $3.20, then increases again.

  • Behavior: Average cost declines quickly because fixed costs are spread over more units.

• Interaction with Marginal Cost:

  • The ATC curve intersects with the marginal cost curve at its minimum point.

  • Explanation:

  • If marginal cost of the next unit is higher than the average, the average increases.

  • If marginal cost is lower, the average decreases.

• Analogy:

  • Similar to grades; if the next quiz score is higher than the previous average, the average goes up, and vice versa.

Average Variable Costs (AVC)

• Definition: Average Variable Cost is calculated by dividing total variable costs by quantity produced.

  • Formula: AVC = \frac{Variable\ Costs}{Quantity}

• Calculation Examples:

  • For 10 packs: Variable Cost = $28, Average Variable Cost = \frac{28}{10} = 2.80

  • For 20 packs: Variable Cost = $48, Average Variable Cost = \frac{48}{20} = 2.40

  • For 30 packs: Variable Cost = $64, Average Variable Cost = \frac{64}{30} = 2.13

  • For 40 packs: Average Variable Cost = $2.05

  • For 50 packs: Average Variable Cost = $2.08

  • For 60 packs: Average Variable Cost = $2.16

  • For 70 packs: Average Variable Cost = $2.31

  • For 80 packs: Average Variable Cost = $2.50

  • For 90 packs: Average Variable Cost = $2.91

  • For 100 packs: Average Variable Cost = $3.42

• Graph Representation:

  • Starts at $2.80 then decreases to $2.13 before rising to $3.42 at 100 units.

• Interaction with Marginal Cost:

  • The AVC curve intersects with the marginal cost curve at its lowest point.

  • Explanation:

  • If marginal cost is higher than average variable cost, AVC increases.

Long Run Costs

• Concept: In the long run, all costs are variable as there are no fixed costs.

• Long Run Average Costs:

  • Changes in operations may include size of the farm or machinery, leading to economies of scale.

  • Result: Long run average costs decrease as output increases.

Conclusion

• Summary of concepts: Understanding the dynamics between ATC and AVC is crucial for analyzing production costs and scaling efficiency. This sets the foundation for discussing revenue in further topics.