Types of Cost Curves

• A total cost curve is the graph of a firm’s

total cost function.
Chapter Twenty-One • A variable cost curve is the graph of a
firm’s variable cost function.
• An average total cost curve is the graph of
Cost Curves a firm’s average total cost function.

Types of Cost Curves Types of Cost Curves

• An average variable cost curve is the • How are these cost curves related to each
graph of a firm’s average variable cost other?
function. • How are a firm’s long-run and short-run
• An average fixed cost curve is the graph of cost curves related?
a firm’s average fixed cost function.
• A marginal cost curve is the graph of a
firm’s marginal cost function.

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 Fixed, Variable & Total Cost Fixed, Variable & Total Cost
•
Functions
F is the total cost to a firm of its short-run
Functions
fixed inputs. F, the firm’s fixed cost, does • c(y) is the total cost of all inputs, fixed and
not vary with the firm’s output level. variable, when producing y output units.
• cv(y) is the total cost to a firm of its variable c(y) is the firm’s total cost function;
inputs when producing y output units. cv(y)
is the firm’s variable cost function. c( y ) = F + c v ( y ).
• cv(y) depends upon the levels of the fixed
inputs.

$ Av. Fixed, Av. Variable & Av.

c(y) Total Cost Curves
cv(y) • The firm’s total cost function is
c( y ) = F + c v ( y ) c( y ) = F + c v ( y ).
For y > 0, the firm’s average total cost
F function is
F c ( y)
AC( y ) = + v
y y
= AFC( y ) + AVC( y ).
F

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 Av. Fixed, Av. Variable & Av. $/output unit
Total Cost Curves
• What does an average fixed cost curve
look like? F
AFC( y ) =
y AFC(y) → 0 as y → ∞
• AFC(y) is a rectangular hyperbola so its
graph looks like ...

AFC(y)

0 y

Av. Fixed, Av. Variable & Av. $/output unit

Total Cost Curves
• In a short-run with a fixed amount of at
least one input, the Law of Diminishing
(Marginal) Returns must apply, causing
the firm’s average variable cost of
production to increase eventually.

AVC(y)

AFC(y)

0 y

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 Av. Fixed, Av. Variable & Av. $/output unit
Total Cost Curves
• And ATC(y) = AFC(y) + AVC(y)

AFC(y) = ATC(y) - AVC(y)

ATC(y)

AFC AVC(y)

AFC(y)

0 y

$/output unit Since AFC(y) → 0 as y → ∞,

ATC(y) → AVC(y) as y → ∞. Marginal Cost Function
And since short-run AVC(y) must • Marginal cost is the rate-of-change of
eventually increase, ATC(y) must variable production cost as the output level
eventually increase in a short-run. changes. That is,

∂ cv ( y)
ATC(y) MC( y ) = .
∂y
AVC(y)

AFC(y)

0 y

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 Marginal and Variable Cost
Marginal Cost Function
Functions
• The firm’s total cost function is • Since MC(y) is the derivative of cv(y), cv(y)
c( y ) = F + c v ( y ) must be the integral of MC(y). That is,
and the fixed cost F does not change with ∂ cv ( y)
MC( y ) =
the output level y, so ∂y
∂ c v ( y ) ∂ c( y )
MC( y ) = = . y
∂y ∂y ⇒ c v ( y ) = ∫ MC( z ) dz.
• MC is the slope of both the variable cost 0
and the total cost functions.

Marginal and Variable Cost Marginal & Average Cost

$/output unit Functions
y′
Functions
c v ( y ′ ) = ∫ MC( z) dz • How is marginal cost related to average
0 variable cost?
MC(y)

Area is the variable

cost of making y’ units
0 y′ y

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 Marginal & Average Cost Marginal & Average Cost
Functions
c ( y)
AVC( y ) = v ∂ AVC( y ) >Functions >
Since , = 0 as MC( y ) = AVC( y ).
y ∂y < <
∂ AVC( y ) y × MC( y ) − 1 × c v ( y )
= .
∂y y2
Therefore,
∂ AVC( y ) > >
=0 as y × MC( y ) = c v ( y ).
∂y < <
∂ AVC( y ) > > c ( y)
= 0 as MC( y ) = v = AVC( y ).
∂y < < y

$/output unit $/output unit

∂ AVC( y )
∂ AVC( y ) MC( y ) > AVC( y ) ⇒ >0
MC( y ) < AVC( y ) ⇒ <0 ∂y
∂y

MC(y) MC(y)

AVC(y) AVC(y)

y y

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$/output unit Marginal & Average Cost
∂ AVC( y ) Functions c( y )
MC( y ) = AVC( y ) ⇒ =0 ATC( y ) =
∂y Similarly, since ,
y
The short-run MC curve intersects
∂ ATC( y ) y × MC( y ) − 1 × c( y )
the short-run AVC curve from = .
below at the AVC curve’s MC(y) ∂y y2
minimum. Therefore,
∂ ATC( y ) > >
=0 y × MC( y ) = c( y ).
as
AVC(y) ∂y < <
∂ ATC( y ) > > c( y )
= 0 as MC( y ) = = ATC( y ).
∂y < < y
y

$/output unit Marginal & Average Cost

∂ ATC( y ) > > Functions
= 0 as MC( y ) = ATC( y )
∂y < < • The short-run MC curve intersects the
short-run AVC curve from below at the
MC(y) AVC curve’s minimum.
• And, similarly, the short-run MC curve
intersects the short-run ATC curve from
ATC(y)
below at the ATC curve’s minimum.

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$/output unit Short-Run & Long-Run Total
Cost Curves
• A firm has a different short-run total cost
curve for each possible short-run
MC(y) circumstance.
• Suppose the firm can be in one of just
ATC(y) three short-runs;
AVC(y)
x2 = x2′
or x2 = x2′′ x2′ < x2′′ < x2′′′.
or x2 = x2′′′.

$ Short-Run & Long-Run Total

cs(y;x2′)
Cost Curves
F′′ = w2x2′ MP1 is the marginal physical productivity
′′ = w2x2′′
F′′ of the variable input 1, so one extra unit of
A larger amount of the fixed cs(y;x2′′)
′′ input 1 gives MP1 extra output units.
input increases the firm’s Therefore, the extra amount of input 1
fixed cost. needed for 1 extra output unit is
Why does 1 / MP1 units of input 1.
a larger amount of Each unit of input 1 costs w1, so the firm’s
′′
F′′ the fixed input reduce the extra cost from producing one extra unit
F′′ slope of the firm’s total cost curve? of output is MC = w 1 .
y MP1
0

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 Short-Run & Long-Run Total $
Cost Curves cs(y;x2′)
w1 F′′ = w2x2′
MC = is the slope of the firm’s total ′′ = w2x2′′
F′′
MP1
cost curve. ′′′ = w2x2′′′
F′′′
cs(y;x2′′)
′′
If input 2 is a complement to input 1 then
MP1 is higher for higher x2.
cs(y;x2′′′)
′′′
Hence, MC is lower for higher x2.
′′′
F′′′
That is, a short-run total cost curve starts
higher and has a lower slope if x2 is larger. ′′
F′′
F′′
0 y

Short-Run & Long-Run Total $

Cost Curves For 0 ≤ y ≤ y′′, choose x2 = x2′. cs(y;x2′)
• The firm has three short-run total cost For y′′ ≤ y ≤ y′′
′′,
′′ choose x2 = x2′′.
′′
curves. ′′ < y, choose x2 = x2′′′.
For y′′ ′′′
• In the long-run the firm is free to choose cs(y;x2′′)
′′
amongst these three since it is free to
select x2 equal to any of x2′, x2′′, or x2′′′. cs(y;x2′′′)
′′′ c(y), the
• How does the firm make this choice? ′′′
F′′′ firm’s long-
′′
F′′ run total
F′′ cost curve.
0 y′′ ′′
y′′ y

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 Short-Run & Long-Run Total
Cost Curves
• The firm’s long-run total cost curve
consists of the lowest parts of the short-
run total cost curves. The long-run total
cost curve is the lower envelope of the
short-run total cost curves.
Short-Run & Long-Run Total
Cost Curves
• If input 2 is available in continuous
amounts then there is an infinity of short-
run total cost curves but the long-run total
cost curve is still the lower envelope of all
of the short-run total cost curves.

$ Short-Run & Long-Run Average

cs(y;x2′)
Total Cost Curves
• For any output level y, the long-run total
cost curve always gives the lowest
cs(y;x2′′)
′′ possible total production cost.
• Therefore, the long-run av. total cost curve
must always give the lowest possible av.
cs(y;x2′′′)
′′′ c(y)
total production cost.
′′′
F′′′
• The long-run av. total cost curve must be
′′
F′′ the lower envelope of all of the firm’s
F′′ short-run av. total cost curves.
0 y

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Short-Run & Long-Run Average $/output unit
Total Cost Curves

• E.g. suppose again that the firm can be in

one of just three short-runs; ACs(y;x2′)
x2 = x2′
or x2 = x2′′ (x2′ < x2′′ < x2′′′) ACs(y;x2′′)
′′
or x2 = x2′′′
then the firm’s three short-run average ACs(y;x2′′′)
′′′
total cost curves are ...

Short-Run & Long-Run Average $/output unit

Total Cost Curves
ACs(y;x2′′′)
′′′
• The firm’s long-run average total cost
curve is the lower envelope of the short-
run average total cost curves ... ACs(y;x2′)

ACs(y;x2′′)
′′
The long-run av. total cost
AC(y)
curve is the lower envelope
of the short-run av. total cost curves.
y

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 Short-Run & Long-Run Marginal Short-Run & Long-Run Marginal
Cost Curves Cost Curves
• Q: Is the long-run marginal cost curve the • The firm’s three short-run average total
lower envelope of the firm’s short-run cost curves are ...
marginal cost curves?
• A: No.

$/output unit MCs(y;x2′) MCs(y;x2′′)

′′ Short-Run & Long-Run Marginal
ACs(y;x2′′′)
′′′ Cost Curves
• For any output level y > 0, the long-run
ACs(y;x2′)
marginal cost of production is the marginal
ACs(y;x2′′)
′′
cost of production for the short-run chosen
by the firm.

MCs(y;x2′′′)
′′′
MC(y), the long-run marginal
cost curve.
y

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$/output unit MCs(y;x2′) MCs(y;x2′′)
′′ Short-Run & Long-Run Marginal
ACs(y;x2′′′)
′′′ Cost Curves
• For any output level y > 0, the long-run
ACs(y;x2′)
marginal cost is the marginal cost for the
ACs(y;x2′′)
′′
short-run chosen by the firm.
• This is always true, no matter how many
and which short-run circumstances exist
MCs(y;x2′′′)
′′′ for the firm.
MC(y), the long-run marginal
cost curve.
y

Short-Run & Long-Run Marginal Short-Run & Long-Run Marginal

Cost Curves $/output unit Cost Curves
• For any output level y > 0, the long-run SRMCs MC(y)
marginal cost is the marginal cost for the
short-run chosen by the firm. AC(y)
• So for the continuous case, where x2 can
be fixed at any value of zero or more, the
relationship between the long-run marginal
cost and all of the short-run marginal costs
is ... y

For each y > 0, the long-run MC equals the
MC for the short-run chosen by the firm.

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