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Lecture 21

The document provides an overview of cost concepts in economics, including fixed costs, variable costs, total costs, and their relationships. It explains how average costs are calculated and the significance of marginal costs in production decisions. The relationship between marginal cost and average total cost, as well as average variable cost, is also discussed.

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6 views

Lecture 21

The document provides an overview of cost concepts in economics, including fixed costs, variable costs, total costs, and their relationships. It explains how average costs are calculated and the significance of marginal costs in production decisions. The relationship between marginal cost and average total cost, as well as average variable cost, is also discussed.

Uploaded by

m9cqwfcdm4
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Cost and Revenue

Introduction to Economics
ECO-101

Instructor: Iqra Mushtaq


Contents….

• Costs
Fixed cost
Variable cost
Total cost
• Average costs
Average fixed cost
Average variable cost
Average total cost
• Marginal cost
• Relationship between costs

remember we are here


“to learn from each other”
Fixed cost
• Fixed costs are those costs that do not vary with changes in output.
• Fixed costs are associated with the existence of a firm’s plant and
therefore must be paid even if its output is zero.
• For example, rental payments, interest, depreciation, and insurance
premiums.
Variable cost
• Variable costs are those costs that change with the level of output.
• For example payments for materials, fuel, power, transportation
services, most labor, and similar variable resources.
• It changes directly with output.
• However, increases in variable cost associated with succeeding one-
unit increases in output is not equal.
• When production begins, variable cost will for a time increase by a
decreasing amount (when marginal product increases) but then rises
by increasing amounts for succeeding units of output (when marginal
product decreases).
Total cost
• Total cost is the sum of fixed cost and variable cost at each level of
output

TC=TFC+TVC

• At zero units of output, total cost is equal to the firm’s fixed cost but
with production, total cost increases by the same amount as variable
cost.
Total, Average, and Marginal-Cost Schedules for an Individual Firm in
the Short Run
• TC is the sum of fixed
cost and variable cost.
• TVC changes with
output.
TFC is independent of
the level of output.
• TC at any output is the
vertical sum of the fixed
cost and variable cost.
Per-Unit, or Average, Costs
• Producers are certainly interested in their total costs, but they are
equally concerned with per-unit, or average, costs.
• Average-cost data are more meaningful for making comparisons with
product price, which is always stated on a per-unit basis.
Average fixed cost
• Average fixed cost (AFC) for any output level is found by dividing total
fixed cost (TFC) by that output (Q). That is
Average variable cost
• Average variable cost (AVC) for any output level is calculated by
dividing total variable cost (TVC) by that output (Q):

• As more variable resources increase output, AVC declines initially,


reaches a minimum, and then increases again. A graph of AVC is a U-
shaped or saucer-shaped curve,
Average total cost
• Average total cost (ATC) for any output level is found by dividing total
cost (TC) by that output (Q) or by adding AFC and AVC at that output
Marginal cost
• Marginal cost (MC) is the extra, or additional, cost of producing
one more unit of output.
• MC can be determined for each added unit of output by noting the
change in total cost that unit’s production entails:
• Marginal cost is directly controlled by firm.
• Marginal cost at first declines sharply, reaches a minimum, and then
rises sharply.
• This reflects the fact that variable costs, and therefore total
cost, increase at first by decreasing amounts and then by increasing
amounts.
• AFC falls as a given amount of
fixed costs is apportioned
over a larger and larger
output.
• AVC initially falls because of
increasing marginal returns
but then rises because
of diminishing marginal
returns.
• ATC is the vertical sum of AVC
and AFC.
Relationship of MC
curve to
the ATC and AVC

• MC curve cuts through ATC


curve and AVC curve at their
minimum points.
• When MC is below Average
total cost, ATC falls
• When MC is above average
total cost, ATC rises.
• When MC is below AVC, AVC
falls
• When MC is above average
variable cost, AVC rises.
Reference
• McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics:
Principles, problems, and policies. Boston McGraw-Hill/Irwin.

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