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AGEC 200 (18)

Competitive Markets

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Agricultural Economics
AGEC 200
Anwar Naseem

Cost Functions - Clicker 1 o Average Fixed Cost curve is always negative o The highest curve is the Total Cost curve o The orange one that crosses all of them is not a variable average. Probably marginal cost curve o Blue is the Average Variable Cost because it’s below the total, it’s Decreasing first = increasing returns first = decreasing curve and then increasing later = decreasing returns. o MC is the orange - Clicker 2 o Q0: Fixed cost is 50 and VC is 0 o Q1, TC is 60, AFC is 50/1 = 50. MC is 20 o Q2: AFC is 25, AVC is 15, ATC = TC/Q o Fixed Cost then Total Cost then Average Fixed Cost… - ATC is usually U-shaped: o As Q (output) rises, input use rises but contribution of extra inputs is getting smaller o Initially you get a lot more output for the inputs that you’re putting in so total cost is going up but output is going up faster than cost o So ATC goes initially down o Then starts to increase because marginal product (output) starts to rise at much slower rate than cost o Cost increasing at faster rate than output - MC: intersects ATC at minimal o When MC below ATC curve, the ATC is decreasing  because extra cost is less than avg  Like everytime you get mark that’s lower than GPA, you bring GPA down  If extra cost is lower then whole cost pulled down o When MC above ATC, it’s pulling up the ATC o It intersects at the minimum which is when decreasing becomes increasing in ATC - In Long run, assume none is fixed. Short run assume it’s fixed - So how do cost curves change in long run (when all factors of production are variable) - LRATC (long run average total cost curve) o Ie firm can choose 3 sizes of factory: S M L, each different size is limited by capital o In long run, can choose any of these, so want to map out the LRATC o Turns out that LRATC simply envelopes the bunch of SRATC o The SRATC are placed consecutively shifting to the right when inc factory size  Widths of curve changes don’t matter o When Q wanted is Qa, want to build a Medium factory. Anything less, doesn’t make sense to have medium or large factory  cuz cost are lowest when talking about 0 to QA o QA to QB, want to have medium size because cost is lowest f
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