ECON 101 Lecture Notes - Lecture 23: Marginal Cost, Fixed Cost, Variable Cost
Example 1: a simple cost function -
● A widget producer bears the following costs:
○ Makes repayments on the loan that enabled him to buy a (non-transferable) widget
making machine ($1000/week)
○ Rents space ($100/week)
○ Pays for electricity ($10/widget)
■ Cost function: C(q) = $1000 + $100 + q$10
● $1000 = sunk → he cannot avoid this cost no matter if he leaves the
market, threw away already at the time he took out the loan
● $100 = fixed but avoidable cost → only relevant to situations in which
producer wants to be operational in the business or not (i.e. renting
his space or not)
● q$10 = avoidable
○ Widget producer’s relevant cost function (over any period longer than a week):
■ C(q) = $100 + q$10
■ AFC(q) = $100/q
■ AVC(q) = $10
■ ATC (q) = $100/q + $10
■ MC(q) = $10 = AVC (q)
Fixed cost + variable cost = total cost
Example 2: a widget producer bears the
following costs -
● Fixed cost
○ Sunk in the short run
○ Avoidable in the long run
● Labor costs
○ Single variable input
○ Variable costs relate only to the costs of labor
○ MPL is shown on the next side
● At low levels of labor input (thus low levels of output), it will
be kind of expensive to increase output - once we get to point
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Document Summary
A widget producer bears the following costs: Makes repayments on the loan that enabled him to buy a (non-transferable) widget making machine (/week) Cost function: c(q) = + + q. = sunk he cannot avoid this cost no matter if he leaves the market, threw away already at the time he took out the loan. = fixed but avoidable cost only relevant to situations in which producer wants to be operational in the business or not (i. e. renting his space or not) Widget producer"s relevant cost function (over any period longer than a week): Fixed cost + variable cost = total cost. Example 2: a widget producer bears the following costs - Variable costs relate only to the costs of labor. Mpl is shown on the next side. Score 15 points in your next game. Score 25 points in your next game. I. e marginal score = 25 > average score.
