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Economics 1021A/B Study Guide - Variable Cost, Average Variable Cost, Diminishing Returns

Course Code
ECON 1021A/B
Jeannie Gillmore

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Chapter 11 Class Notes
Every firm has one goal
To maximize profit
- by minimizing costs
Short run
At least one factor of production is fixed
Long run
In which all factors of production can be changed
Sunk cost
Marginal product = change in total product when we increase labour by 1**
Always plot at halfway point
Average Product = change in total / change in labour
When marginal product is above average product average increases
When marginal product is below average product average falls
At max average product marginal product = average product intersect
TC = TVC + TFC (total variable cost + total fix cost)
TVC increases as output increases as TFC remains constant, TC increases as
output increases
TC/Q = TVC/Q + TFC/Q (Q = output)
Then we get ATC = AVC + AFC (average total cost = average variable cost + average fix
Memorize marginal costs and average costs
Avg fixed cost downward sloping curve AFC = TFC (constant)/Q (increasing)
have costs regardless of producing or not as Q increases curve slopes down
Avg variable cost U shaped law of diminishing returns
Avg total cost = sum of AFC + AVC U shaped b/c upward part of avc curve bigger than
download sloping AFC curve
Marginal cost increase in TC that arises from producing one more unit
Marginal cost < AVC AVC is decreasing
MC > AVC AVC is increasing
MC + AVC curves intersect at min AVC
MC < ATC ATC is decreasing
MC > ATC ATC is increasing
MC + ATC curves intersect at min ATC
No relationship b/w marginal cost and AFC b/c MFC does not change
Min of ATC to the right of min of AVC occurs at greater quan than AVC min
b/c b/w min AVC and ATC downward effect of AFC curve is greater than upward
effect of the AVC curve
ATC = AVC + AFC AFC is getting smaller vertical distance b/w avc and atc = afc
Avg product increase AVC decreases
Avg product decrease AVC increase
Max avg product occurs at min AVC
Output = labour on x-axis
Long run avg cost curve composed of min part of each indiv ATC curve
has scalloped shape
lowest part (min) of LRAC curve min efficient scale
economies of scale LRAC deceases as output increases
diseconomies of scale LRAC increases as output increases
only apply to long run curve not short run curve
at bottom of the curve min return scale derivative of 0 constant return to scale