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Lecture 8

ECON101 Lecture Notes - Lecture 8: Average Variable Cost, Marginal Cost, Fixed Cost


Department
Economics
Course Code
ECON101
Professor
Corey Van De Waal
Lecture
8

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Shifts in the Cost Curves
- The position of a firm’s cost curves depend on two factors:
o Technology
New technology increases productivity
An increase of technology shifts production curves
A shift in production curves will in turn cause a shift in
cost curves
Increase in technology allows more output to be
produced from the same resources cost curves shift
downward
Better technology firms can produce more
outputs while keeping the resources constant,
which lowers the cost of production holistically
o Prices of factors of production
A fall in the price of the fixed input shifts the average
fixed cost and the average total cost curves downward
But the average variable cost and marginal cost curves
are left unchanged because these costs only reflect
changes in the firm’s variable costs
A fall in the price of a variable input shifts the average
variable cost, average total cost, and marginal cost
curve DOWNWARD, but the average fixed cost is left
UNCHANGED
Why the Average Total Cost Curve Is U-Shaped
- ATC curve = vertical sum of the AFC curve and the AVC curve
- U-shape of the ATC curve arises from the influence of two
opposing forces:
o Spreading total fixed cost over a larger output AFC curve
slopes downward as output increases
o Eventually diminishing returns the AVC curve upward and
AVC increases more quickly than AFC is decreasing
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