Cost Curves

• What are the types of costs firms need to understand?

  Total cost, fixed cost, variable cost
• What is the formula for Total Cost?

  Total Cost = Total Fixed Costs + Total Variable Costs
• How do fixed costs behave with output?

  They do not vary with output
• What happens to fixed costs when output is zero?

  They are still present
• How do variable costs behave with output?

  They vary with output
• What does MC stand for in cost analysis?

  Marginal Cost
• What is the formula for Average Fixed Cost?

  Average Fixed Cost = Total Fixed Cost / Output
• What is the formula for Average Variable Cost?

  Average Variable Cost = Total Variable Cost / Output
• What is the formula for Average Total Cost?

  Average Total Cost = Total Cost / Output
• What is the relationship between different types of costs?

  • Total Cost = Total Fixed Costs + Total Variable Costs
  • Average costs are derived from total costs divided by output
  • Marginal Cost is the cost of producing an additional unit
• What does the Law of Diminishing Returns apply to?

  Short run production
• What does the Law of Diminishing Returns state?

  Adding more of one factor yields lower returns
• How does the addition of labor affect marginal output?

  Marginal output will eventually fall
• What happens to marginal cost when diminishing returns set in?

  Marginal cost increases
• How is marginal cost calculated?

  • Marginal Cost = Change in Total Cost / Change in Output
  • It reflects the cost of producing one additional unit
• What is the relationship between average cost and marginal cost?

  MC intersects AC at its lowest point
• What happens when MC is below AC?

  Average Cost will be falling
• What happens when MC is above AC?

  Average Cost will be rising
• What should you look for to find productive efficiency?

  Where MC intersects AC
• What are the key points about the relationship between average and marginal costs?

  • MC intersects AC at its lowest point
  • If MC < AC, then AC is falling
  • If MC > AC, then AC is rising