ECON 1 Lecture Notes - Lecture 29: Diminishing Returns, Average Variable Cost, Average Cost

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Fixed cost: firm must pay even if no output is produced; pays for fixed resources. Variable cost: for variable resources; depends on amount of labor employed and on the wage. Changes in mc reflect changes in marginal productivity of the variable resource. Total cost: fixed cost + variable cost. Variable cost starts from origin since output is 0, increases slowly at first and then with diminishing marginal returns, increases rapidly total cost curve starts at fixed cost on y axis. Sums fixed cost curve and variable cost curve. Marginal: marginal cost first declines, then experiences increasing marginal returns and increases, and then diminishing marginal returns. Average total cost: total cost/output or sum of average fixed cost and average variable cost. Relationship between marginal cost and average cost: When mc is less than average cost, the marginal cost pulls down average cost. When mc is greater than average cost, average cost increases.

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