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ECON 1B03 Lecture Notes - Factor X, Fiat 500L, Biasing

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Hannah Holmes

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Econ 1B03 Chapter 13
Jerry’s total cost function could be written as
o C) TC = 200 + 500L
Recalling that TC = TVC + TFC, let’s add these costs to our TC diagram
The TC curve is siply the TVC curve shifted up by the amount of fixed costs
The TC curve gets increasingly steeper.
Costs start to increase faster due to diminishing MP.
Let’s now graph Jerry’s average and marginal costs:
Minimum of AVC and ATC intersects MC curve at their minimums.
When MC > ATC, ATC increases
When MC > AVC, AVC increases
When MC < ATC or AVC, ATC, AVC is decreasing
When we are at minimum ATC the amount of quantity is our Q point efficient scale. Means you
are producing the right amount that minimizes ATC. Also operating at what we call capacity.
MC intersects AVC at min AVC.
MC intersects ATC at min ATC.
Whenever MC < AVC or ATC, AVC and ATC must be falling.
Whenever MC > AVC or ATC, AVC and ATC must be rising.
Min ATC is he point of efficient scale.
We say the firm is operating at capacity (or efficient capacity) just the right amount of output.
Any Q greater or less than the Q at min ATC has a higher ATC.
If we’re producing Q such that we’re at efficient scale, we are minimizing ATC.
The ATC curve is U-shaped because:
o At very low levels of output, ATC is high because fixed cost is spread over only a few
o ATC declines as Q increases but starts rising because AVC increases substantially.
MC eventually rises with output
The distance between ATC and AVC on the diagram is AFC.
The MC curve is the “inverse” of the MP curve and ATC is the “inverse” of AP
We often omit drawing the AFC curve because as we shall soon see, AFC doesn’t really play a
role when firms decide how much to produce in the SR.
Moreover, the MC curves in the diagram in the text are depicted as linear (no doubt for
Generally, MC decreases initially and then rises as diminishing MP sets in, as in our example of
Jerry’s TV’s.
Changes in Short Run Costs
When cost change, the firm’s SR cost structure will change.
For example, say Jerry hires an office manager whose salary increases his fixed costs.
This will also increase his average fixed costs and his average total costs.
These curves will shift up on our SR cost diagram
Suppose that Jerry’s labour costs increase.
This will increase variable, marginal and total costs.
The AVC, MC and ATC will shift up
If costs decreased, the affected curves would shift down.