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Lecture 15

# ECON 20A Lecture 15: Cost Measures

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Department
Economics
Course
ECON 20A
Professor
Shan, H.
Semester
Fall

Description
Lecture 15 Chapter 13 (cont) Various cost measure ( short run) fixed cost and variables cost 1. Total cost = fixed costs + variable cost Fixed cost : cost of equipment, loan payments, rent Variables cost: cost of materials 2. Average cost = total cost total output AC or ATC = TC Q = FCQ + VCQ AC = AFC + AVC For fixed cost, as Q rises, numerator spreads out thingy AVC = VC Q Why ATC is usually ushaped As Q rises, initially , falling AFC pulls ATC down Eventually, rising AVC pulls ATC up Efficient scale: the quantity that minimizes ATC Where AC is minimum and MC cuts it 3. Marginal cost (MC) MC = TC Q How much does it cost to make one extra cup of coffee? AC: TC is divided across all units produced MC: increase in TC with each additional cup of coffee unit produced MC will decrease first then increase MC may fall initially due to specialization but as output increases MC rises due to diminishing MP of Labor MC and ATC When MC < ATC, ATC is falling When MC > ATC, ATC is rising The MC curve crosses the ATC curve at the ATC curves minimum With negative slope average is decreasing because MC is low With positive slope average is rising because the MC is large
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