• Chapter 22 Cost Curves

• Key Concept: We define average cost and

marginal cost curves and see their
connections.
• cs(y)=cv(y)+F

• ACs(y)
= cs(y)/y
= cv(y)/y+F/y
= AVC(y)+AFC(y)
• cs(y)=cv(y)+F

• MC(y)
= ∆cs(y)/∆y
= {[cv(y+∆y)+F]-[cv(y)+F]}/∆y
• MVC(y)
= ∆cv(y)/∆y
= [cv(y+∆y)-cv(y)]/∆y
• Thus MC(y)=MVC(y).
• All the average costs and marginal costs
share the same unit, i.e. dollar/output.

• MC(0)
= [cv(∆y)-cv(0)]/∆y
= cv(∆y)/∆y
= AVC(0)

• We have seen this before (Ch. 15) at

MR(0)=AR(0) or MR at x=0 equals p.
• We now explore the relationship between
average cost and marginal cost.

• Average grade vs. marginal grade

• dAVC(y)/dy
= d(cv(y)/y)/dy
= [yd(cv(y)/dy)-cv(y)]/y2
= [MC(y)-AVC(y)]/y

• AVC decreasing  MC<AVC

• AVC increasing  MC>AVC
• AVC flat  MC=AVC
• dAC(y)/dy
= d[(cv(y)+F)/y]/dy
= [yd((cv(y)+F)/dy)-(cv(y)+F)]/y2
= [MC(y)-AC(y)]/y

• AC decreasing  MC<AC
• AC increasing  MC>AC
• AC flat  MC=AC
• MC passes through the minimum of both
the AVC and AC.

• AVC and AC get closer and y becomes

larger because AFC (the difference
between AC and AVC) is smaller and
smaller.
• Since MC(y)=dcv(y)/dy
• integrating both sides we get
• cv(y)-cv(0)=0yMC(x)dx.
• Since cv(0)=0, the area under MC gives
you the variable cost.

• So there is a connection between the

AVC curve and the area under MC curve.
• An illustrating example
• cv(y)=y2
• cf(y)=1

• AVC(y)=y
• AC(y)=y+1/y
• MC(y)=2y

• minyAC(y)
• 1-(1/ y2)=0  y=1
• Suppose you have two plants with two
different cost functions, what is the cost
of producing y units of outputs?

• You must use the min cost way.

• In interior solution, must allocate y=y1+y2
so that MC1(y )=MC2(y2).
1

• In other words, the MC of the firm is the

horizontal sum.
• Similarly if a firm sells to two markets,
(in interior solution) must sell to the point
where two MRs equal.
• Now we turn to the LR.

• LR costs: no fixed costs by definition, but

AC curve may still be U-shaped because
of the quasi-fixed cost.

• Quasi-fixed costs are costs that are

independent of the level of output, but
only need to be paid if the firm produces
a positive amount of output.
• From above
cs(x2(y),y)=c(y) and
cs(x2,y)c(y) for all x2.

• Hence
ACs(x2(y),y)=AC(y) and
ACs(x2,y)AC(y) for all x2.
• In words, the LR AC is the lower
envelope of the SR AC.

• This is still true if we have discrete levels

of plant size.
• Regarding MC
• since c(y)=cs(x2(y),y), so
MC(y)
=dc(y)/dy
=cs(x2(y),y)/y+[cs(x2,y)/x2]|x (y)[x2(y)/y]
2

• Note that x2(y) is defined to be the fixed

factor which minimizes the cost, in other
words, for a given y, cs(x2,y)/x2=0 at
x2=x2(y). So LR MC coincides with SR MC.
• Mention discrete levels of plant size.
• MC(y)
=cs(x2(y),y)/y

• LR MC coincides with SR MC.

• Let us work out the Cobb Douglas

example to convince ourselves.
• Chapter 22 Cost Curves

• Key Concept: We define average cost and

marginal cost curves and see their
connections.