ECO1104 Nov. 21 , 2013
YUJIE YI #7038840
Chapter 13 The Firm’s Cost Curves
Transition from Productivity to Costs
Distinction between the fixed costs and the variable costs of production
Variable costs increase with the level of production
Fixed costs remain constant with the level of production
In order to make the transition from the physical productivity (not denominated in
dollars) to the costs of production, consider the following numerical illustration:
Suppose that the going wage for labor (the one variable factor) is $10/ hour
Suppose that the schedule for the marginal product of labor is: first worker = 10
units/ hour; second worker = 10; third worker = 8; fourth worker = 7
Given these figures, one can derive the costs of production, which are crucial to any
The first worker hired produces 10 units per hour and costs the firm $10 to employ,
so the labor cost PER UNIT OF OUTPUT = $10/ 10 = $1
Concerning costs in terms of per unit
The second worker hired produces 10 units per hour and costs the firm $10 to
employ, so the labor cost per unit of output = $10/ 10 = $1
1 /7 The third worker hired produces 8 units per hour and costs the firm $10 to employ,
so the labor cost per unit of output = $10/ 8 = $1.25
The fourth worker hired produces 7 units per hour and costs the firm $10 to employ,
so the labor cost per unit of output = $10/ 7 = $1.43
Note the pattern – the MP of labor is decreasing due to the diminishing MP, while the
wage remains constant. This implies:
Diminishing Marginal Product Translates into Increasing PER UNIT Production
Whereas the TP and the MP are functions of the level of input of the variable factor, the
cost functions are functions of the level of output, Q.
Total Costs = TC (Q) = TFC (Q) + TVC (Q). These (TC and TVC) increase directly with
the level of production. (Figures 13.3 – 13.4)
TFC is the constant function.
Average Total Costs = ATC (Q) = TC (Q) / Q = TFC / Q + TVC / Q = AFC (Q) + AVC
(Q) = overhead per unit + variable costs per unit (Figure 13.5)
The overhead per unit costs refer to the average fixed costs.
Figure 134: Thirsty Thelma’s TotalCost Curve
The more you produce, the more it going to cost you.
TC curve gets steeper and steeper ECO1104 Nov. 21 , 2013
YUJIE YI #7038840
$3.00 refers to the total fixed costs of production.
Total variable cost has the same curve with the total cost.
Marginal Cost = MC (Q) = ΔTC (Q) / ΔQ = ΔTFC (Q) / ΔQ + ΔTVC (Q) / ΔQ = ΔTVC
(Q) / ΔQ = the cost of producing the marginal unit .
It equals to the change in total variable costs of production divided by the change in
It’s the slope of TC (Q)
It’s the derivative of the TC function with respect to Q: Δ(TC) / ΔQ
Figure 135: Thirsty Thelma’s AverageCost and MarginalCost Curves (FINAL)
Note how MC cuts ATC at its minimum point
The marginal cost curve slopes upward
The average variable cost curve always bellows the average total cost curve.
AFC + AVC = ATC
The average total costs include the average fixed costs and average variable costs.
The most important curves are MC and ATC.
3 /7 Important Concept
The perunit cost variables of MC, AFC, ATC, AVC depend on the operating level of the
E.g. a hotel t