● If input increases, total cost increases because he needs to use more laborers to

produce more output

● Total cost curve is positive related to the quantity of output being produced
● Total cost minus fixed cost is the variable cost
● Variable cost is what he pays for extra unit of labor

Cost curves
1. Average cost
● AC=TC/Q
1. Average variable cost
● AVC=VC/Q
1. Average fixed cost
● AFC=FC/Q
● Only curve that is not U-shaped
● Declining forever
● This is because Q in the denominator is rising but fixed cost is fixed so therefore AFC
declines as more output is produced
● Spreading the overhead - the declining of AFC as more output is produced

Marginal cost curve

● Is the most important.
● At first is falling but eventually it will start rising
● Change in total cost over change in quantity
● U-shaped
● The rising portion is the firm's supply
● Rising portion is the most important

What is the meaning of the U-shaped curves

● As one unit of output is produced, MC/AC/AVC increase
● MC intersects AC CURVE and AVC at minimum points of these curves
● Minimum points are where the MC touches. i.e. minimum points of ACC and AVC.
● This is where marginal cost intersects the AVC and AC CURVE.
● In minimum points, AC=MC or neither is falling or rising

Rules
● MC > AC = AC PULLED UP
● MC < AC = AC PULLED DOWN
● MC = AC = neither rising or falling, as it is in its minimum

● AC is the sum of AFC and AVC

● Marginal productivity is a factor of production (input)
 ● Marginal cost is associated the output
● MP goes up by little then declines
● MC goes down a little then rises
● The rising portion of the MC is the supply function

Diminishing marginal productivity

● Other inputs are held constant
● Not as productive as the first input

Relationship of marginal cost and marginal product

● The falling of marginal product cause the marginal cost to increase
● Not squeezing the same amount of extra output as you increase your input or labor
● The additional cost becomes more expensive to produce an addition output

Diminishing Returns and U-shaped Cost Curves

● Graph of diminishing productivity of labor/factor of production
● When the graph of MP and MC is combined, when MP are being productive or rises,
marginal cost decreases. Vice versa
● Everything are held constant
● Because of a higher marginal cost, the price of the product should match in the graph. 6
ear of corn is 90 pesos. The producers are willing to produce if the price is 90 or above
● Higher marginal cost, higher price for you to be willing to produce/supply
● This is the idea behind the upward sloping of supply curve
● Same as the marginal utility of drinking water falls and what prices does he have to pay
in relation with the diminishing marginal utility

What is the significance of having a U-Shaped cost curve

● Because if the MC is forever downward sloping, that firm would dominate the industry
● If MC is downward sloping, the firm would be able to produce a very large quantity of
outputs at a very low price

Equilibrium condition
● Least-cost rule
● Solution to the producers problem
● Common marginal product on peso spent on any factor of production
● If not equal, the firm could reallocate by reducing the use of low MP and increasing the
use of the factor of production of high MP, he will do better. The increase in using of the
high MP would later on lower the MP and the scarcity of the lower MP would later
increase resulting to the equilibrium of both factor of production
● The question is: How much of capital and labor should the producer use given their
prices and state of technology in order to solve his/her problem
● If there would be a shift in one factor of production, holding constant other factors, it
would affect the other input and would become cheap/expensive
 ● Example: Between land and labor, if wage or price of labor falls, labor would become
cheap.
● It would create a less or greater than of the two factors of production

What are held constant

● Prices of factors of productions/inputs that are given
● State of technology

Opportunity Cost
● The things you paid for
● Value of the next best available alternative.
● Even if the factors of production are owned by the producer, there is still opportunity cost
of using it
● Opportunity cost example is having an owned land and choosing between renting it out
to a farmer or renting it to a mall owner.
● All factors of production have opportunity cost

Isoquant or Equal-Product Curve

● Two factors of production that produce the same amount of output
● Iso is a prefix that means "the same" and quant is for "quantity"
● Every point shows combinations of 2 different inputs that yield amount of total output
● Based on technical recipe
● What current technology says of what you could combine different amount of two inputs
to produce same amount of output
● Question is: what is the cheapest way to produce corn?

Shape of an Isoquant
● Convex because of the law of diminishing marginal productivity
● Slope is not constant
● Slope tells you how much one factor of production you are willing to give up to get an
additionally unit of the other one
● Scarce input has a high marginal product
● More abundant, means lower marginal product
● As the slope goes flatter, you are willing to sacrifice less
● It goes flatter because of the law of diminishing marginal productivity

Slope of Isoquant
● Ratio of the marginal product of two factors of production
● MPlabor/Mpland
● The quantity of input are inversely related to the MP

Budget Line or Equal cost line or Isocost

● Combinations of prices 2 inputs where your total cost is the same
 ● Any points along the line represents a combination of land and labor that all cost the
same given individual prices of labor and land

Slope of budget line

● Ratio of prices of two inputs
● Price of labor/Price of land
● A change of price has a change of line because the ratio changed

Solution to the problem

● Least-cost input combination
● Point of tangency of isocost and isoquant that the point lies closer to the origin is the
solution because close to the origin has the lowest price with the same amount of total
output

FROM THE BOOK

Total cost
● Represents the lowest total dollar expense needed to produce each level of output
● TC rises as Q rises

Fixed cost
● Unaffected by any variation in quantity of output

Variable cost
● All costs that are not fixed

Average cost
● By comparing average cost with price or average revenue, we can determine whether or
not we are profiting

Average fixed cost

● If it is a failure, it is high.

Short run
● Capital is fixed cost

Long run
● All are variable cost and no fixed cost