DP1 Econ. Supplementary Notes Cost curves P.

The shape of various cost curves in the SR:

A. Total variable cost (TVC) and marginal cost (MC) curves:
The shape of cost curves in the SR is a reflection of the law of
_______________________ ______________________________. Output (TP) in the SR
initially rises at an _____________________ rate up until that unit of labour at which
_________________________________ set in.
Thus, as more is produced, TVC rises initially at a _______________________ rate until
the unit of output at which _________________________________ set in production.
Beyond that unit, TVC rises at an ______________________________ rate.
MC is the slope of TVC. So since TVC rise at a decreasing rate initially and at an
increasing rate after the diminishing marginal returns set in, MC initially will decrease and
then start to increase. (Again, when will MC start to increase?)
Now, draw the TVC curve in the upper diagram and then the MC curve in lower diagram:

Fig.1 TVC and MC curves

DP1 Econ. Supplementary Notes Cost curves P.2

B. TC, TFC and TVC in one diagram

TFC are costs that do not vary when the output level varies. They exist even there is no
output at all. (Can you name some example?) Thus, TFC is a parallel line to the quantity
axis.
The shape of TC and TVC curves are the same, except the former curve has been shifted
up by the amount of the _______. Thus, the _________________ distance between the
TC and the TVC is the same.
When you draw these curves, draw the TVC and TFC first, and lastly TC.

Fig.2 TC, TFC, TVC

C. ATC, AFC, AVC

Since AFC = ______ _______, the AFC curve continuously decreases as output rises,
but never drop to zero.

Fig.3 AFC

DP1 Econ. Supplementary Notes Cost curves P.3

Since ATC = ______ + ________. Thus, ATC lies _________ the AVC, and the vertical
distance between the two curves becomes _____________ and _____________ as the
output increases. (Do you know why?)
Both the ATC and AVC curves are _____________ curve because of the law of
________________________________________ and the behavior and shape of the AP
curve. The AVC curve is the mirror image of the AP curve.
When you draw the ATC and AVC on the same diagram, first draw the ATC. Note the
ATC minimum. Then draw the AVC below the ATC. Make sure that the AVC minimum is
to the left of the ATC minimum.
AVC is the slope of a line that is
drawn from the origin to a point
on the TVC. The slopes of theses
lines are decreasing initially and
increasing after the diminishing
average returns set in, AVC
initially will decrease and then
start to increase.
Remember the two curves get closer and
closer (but do not touch) as you draw the
curves to the right.

Fig.4 ATC and AVC

D. How to draw ATC, AVC and MC curves in the same diagram

`
ATC and AVC curves are U-shaped and MC curve is like a Nike logo. Remember:
If MC < AC (AVC), then AC (AVC) will drop.
If MC > AC (AVC), then AC (AVC) will rise.
If MC = AC (AVC), then AC (AVC) is at a minimum

Fig.5 ATC, AVC and MC curves