Cost Curves
Types of Cost Curves
A total cost curve is the graph of a
firm’s total cost function.
A variable cost curve is the graph of
a firm’s variable cost function.
An average total cost curve is the
graph of a firm’s average total cost
function.
Types of Cost Curves
An average variable cost curve is the
graph of a firm’s average variable
cost function.
An average fixed cost curve is the
graph of a firm’s average fixed cost
function.
A marginal cost curve is the graph of
a firm’s marginal cost function.
Types of Cost Curves
How are these cost curves related to
each other?
How are a firm’s long-run and short-
run cost curves related?
Fixed, Variable & Total Cost Functions
F is the total cost to a firm of its short-
run fixed inputs. F, the firm’s fixed
cost, does not vary with the firm’s
output level.
cv(y) is the total cost to a firm of its
variable inputs when producing y
output units. cv(y) is the firm’s variable
cost function.
cv(y) depends upon the levels of the
fixed inputs.
Fixed, Variable & Total Cost Functions
c(y) is the total cost of all inputs,
fixed and variable, when producing y
output units. c(y) is the firm’s total
cost function;
c( y ) F c v ( y ).
$
y
$
cv(y)
y
$
cv(y)
y
$
c(y)
cv(y)
c( y ) F c v ( y )
y
Av. Fixed, Av. Variable & Av. Total
Cost Curves
Thefirm’s total cost function is
c( y ) F c v ( y ).
For y > 0, the firm’s average total
cost function is
F cv ( y)
AC( y )
y y
AFC( y ) AVC( y ).
Av. Fixed, Av. Variable & Av. Total
Cost Curves
Whatdoes an average fixed cost
curve look like?
F
AFC( y )
y
AFC(y) is a rectangular hyperbola so
its graph looks like ...
$/output unit
AFC(y) 0 as y
AFC(y)
0 y
Av. Fixed, Av. Variable & Av. Total
Cost Curves
Ina short-run with a fixed amount of
at least one input, the Law of
Diminishing (Marginal) Returns must
apply, causing the firm’s average
variable cost of production to
increase eventually.
$/output unit
AVC(y)
0 y
$/output unit
AVC(y)
AFC(y)
0 y
Av. Fixed, Av. Variable & Av. Total
Cost Curves
And ATC(y) = AFC(y) + AVC(y)
$/output unit
ATC(y) = AFC(y) + AVC(y)
ATC(y)
AVC(y)
AFC(y)
0 y
$/output unit
AFC(y) = ATC(y) - AVC(y)
ATC(y)
AFC AVC(y)
AFC(y)
0 y
$/output unit Since AFC(y) 0 as y ,
ATC(y) AVC(y) as y
ATC(y)
AFC AVC(y)
AFC(y)
0 y
$/output unit Since AFC(y) 0 as y ,
ATC(y) AVC(y) as y
And since short-run AVC(y) must
eventually increase, ATC(y) must
eventually increase in a short-run.
ATC(y)
AVC(y)
AFC(y)
0 y
Marginal Cost Function
Marginal cost is the rate-of-change of
variable production cost as the
output level changes. That is,
cv ( y)
MC( y ) .
y
Marginal Cost Function
Thefirm’s total cost function is
c( y ) F c v ( y )
and the fixed cost F does not change
with the output level y, so
c v ( y ) c( y )
MC( y ) .
y y
MCis the slope of both the variable
cost and the total cost functions.
Marginal and Variable Cost Functions
Since MC(y) is the derivative of cv(y),
cv(y) must be the integral of MC(y).
That is, cv ( y)
MC( y )
y
y
c v ( y ) MC( z) dz.
0
Marginal and Variable Cost Functions
$/output unit y
c v ( y ) MC( z)dz
0
MC(y)
Area is the variable
cost of making y’ units
0 y y
Marginal & Average Cost Functions
How is marginal cost related to
average variable cost?
$/output unit
MC(y)
AVC(y)
y
$/output unit
AVC( y )
MC( y ) AVC( y ) 0
y
MC(y)
AVC(y)
y
$/output unit
AVC( y )
MC( y ) AVC( y ) 0
y
MC(y)
AVC(y)
y
$/output unit
AVC( y )
MC( y ) AVC( y ) 0
y
MC(y)
AVC(y)
y
$/output unit
AVC( y )
MC( y ) AVC( y ) 0
y
The short-run MC curve intersects
the short-run AVC curve from
MC(y)
below at the AVC curve’s
minimum.
AVC(y)
y
Marginal & Average Cost Functions
How is marginal cost related to
Average total cost?
$/output unit
ATC( y )
0 as MC( y ) ATC( y )
y
MC(y)
ATC(y)
y
Marginal & Average Cost Functions
The short-run MC curve intersects
the short-run AVC curve from below
at the AVC curve’s minimum.
And, similarly, the short-run MC
curve intersects the short-run ATC
curve from below at the ATC curve’s
minimum.
$/output unit
MC(y)
ATC(y)
AVC(y)
y
Short-Run & Long-Run Marginal Cost
Curves
For any output level y > 0, the long-
run marginal cost is the marginal
cost for the short-run chosen by the
firm.
This is always true, no matter how
many and which short-run
circumstances exist for the firm.
Short-Run & Long-Run Marginal Cost
Curves
For any output level y > 0, the long-
run marginal cost is the marginal
cost for the short-run chosen by the
firm.
So for the continuous case, where x2
can be fixed at any value of zero or
more, the relationship between the
long-run marginal cost and all of the
short-run marginal costs is ...
Short-Run & Long-Run Marginal Cost
Curves
$/output unit
SRACs
AC(y)
y
Short-Run & Long-Run Marginal Cost
Curves
$/output unit
SRMCs
AC(y)
y
Short-Run & Long-Run Marginal Cost
Curves
$/output unit
SRMCs MC(y)
AC(y)
y
For each y > 0, the long-run MC equals the
MC for the short-run chosen by the firm.
