ECO-4 Lecture Notes - Lecture 19: Average Variable Cost, Marginal Cost, Marginal Product
Introductory Economics
Notes
Joseph Yang
MARGINAL COST & AVERAGE COST
○ The marginal cost curve (MC) intersects the average variable cost curve (AVC) &
average total cost curve (ATC) @ MINIMUM POINTS
○ WHEN MC < AVC/ATC AVC & ATC = decreasing
○ WHEN MC > AVC/ATC ATC & AVC = increasing
WHY ATC IS U SHAPED
1. Spreading total fixed cost over a larger output
2. Eventually diminishing returns
■ As output increases, average variable cost decreases initially but eventually
increase
COST CURVES & PRODUCT CURVES
○ When marginal product is rising, marginal cost is falling.
○ MC is at its minimum at the same output level at which marginal product is at its
maximum.
○ When average product is rising, average variable cost is falling.
○ AVC is at its minimum at the same output level at which average product is at its
maximum
IF AFC decreasing more quickly than AVC increasing, then
ATC is decreasing
IF AVC increasing more quickly than AFC decreasing, then
ATC is increasing
SHIFTS IN THE COST CURVES
○ Position of a firm’s short-run cost curves depends on 2 factors
■ Technology
■ Prices of factors of production
TECHNOLOGY
○ Technological change that increases productivity increases marginal product &
average product of labour
■ (same factors of production w/ better technology = lowered cost & shift cost
curves downward & product curves shift upward)
■ Relationship of product curves & cost curves don’t change!
PRICE OF FACTORS OF PRODUCTION
○ An increase in the price of a factor of production increases the firm’s costs & shifts its
cost curves
Document Summary
The marginal cost curve (mc) intersects the average variable cost curve (avc) & average total cost curve (atc) @ minimum points. When mc < avc/atc avc & atc = decreasing. When mc > avc/atc atc & avc = increasing. Why atc is u shaped: spreading total fixed cost over a larger output, eventually diminishing returns. As output increases, average variable cost decreases initially but eventually increase. When marginal product is rising, marginal cost is falling. Mc is at its minimum at the same output level at which marginal product is at its maximum. When average product is rising, average variable cost is falling. Avc is at its minimum at the same output level at which average product is at its maximum. If afc decreasing more quickly than avc increasing, then. If avc increasing more quickly than afc decreasing, then. Position of a firm"s short-run cost curves depends on 2 factors.
