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Cost Curves Reviewer (Economics)
Cost Curves Reviewer (Economics)
Cost Curves Reviewer (Economics)
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
Rules
● MC > AC = AC PULLED UP
● MC < AC = AC PULLED DOWN
● MC = AC = neither rising or falling, as it is in its minimum
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
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
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
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
Short run
● Capital is fixed cost
Long run
● All are variable cost and no fixed cost