Costs

1
Chapter 7 Lecture 3
Costs
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Relationship between the Production Function and
the Shape of the Cost Curves in the Short-Run

• Shape of MC
• MC ?VC/?q w?L/?q
• Given that ?L/?q 1/MPL
• Then,
• MC w/MPL
• MC and MPL moves in the opposite direction. In
  short-run, the firm increases output only by
  increasing labor. At low levels of labor, the MPL
  increases as L increases, then MC decreases. If
  firm increases its labor enough, it reaches the
  point of diminishing marginal returns to labor,
  at which each extra unit increases output by a
  smaller amount. So, MPL decreases and then, MC
  increases.
• The U-shape of the MC is explained by its
  relationship with the MPL.

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Relationship between the Production Function and
the Shape of the Cost Curves in the Short-Run
(cont.)

• Shape of AVC
• AVC VC/q wL/q
• Given that L/q 1/APL. Then,
• AVC w/APL
• AVC and APL moves in the opposite direction. As
  we know, APL tends to rise and then fall. So, AVC
  tends to fall and then rise. The U-shape of the
  AVC is explained by its relationship with the
  APL.
• Shape of AC The AC curve is the vertical sum of
  the AVC and AFC. If AVC curve is U-shaped, adding
  a strictly falling AFC makes the AC falls more
  steeply than the AVC at low levels of output. At
  high levels of output, AVC and AC curves differ
  by smaller amounts. Then, AC curve is also
  U-shaped and its shape is explained by the
  relationship of the AVC with the APL.