Costs Fixed, Variable and Total Costs

1
CostsFixed, Variable and Total Costs

• A FIXED COSTS (FC)
• - Costs that do not vary with the level of
  output
• - They are present even when the output is zero
• - Include any debt repayments, insurance,
  leases and mortgages

2

• B VARIABLE COSTS (VC)
• - Costs that vary with the level of output
• - Includes wages, salaries, most of the
  utilites

3

• C TOTAL COSTS (TC)
• - All fixed costs All variable costs

4
Average Costs

• A AVERAGE FIXED COSTS AFC
• AFC Fixed Costs FC
• Output Q
• B AVERAGE VARIABLE COSTS AVC
• AVC Variable Costs TC
• Output Q

5

• C AVERAGE TOTAL COSTS ATC
• ATC Total Costs TC
• Output Q
• ATC AFC AVC

6
Marginal Costs

• Marginal Cost Change in total cost
• Change in output
• - TC
• - Q

7

• The change in output is always measured in units
  of one. Therefore
• Marginal Cost TC
• 1
• Marginal Cost TC

8
Relationship Between Marginal and Average Costs

•     1) This semesters GPA is your marginal GPA.
  (the most recent)
• 2) Your cumulative GPA is your average GPA.
• 3) What happens to your cumulative GPA if this
  semesters GPA is greater than your average GPA?

9

• 4)  A rising marginal GPA leads to rising
  cumulative GPA.
•  
• 5)  A rising marginal GPA leads to a rising
  average GPA.
• 6) What happens to your cumulative GPA if this
  semesters GPA is worse than your cumulative GPA?

10

• 7) A falling GPA leads to a falling cumulative
  GPA.
• 8) A falling marginal GPA leads to a falling
  average GPA.

11

• The marginal costs drive the average costs.
•  
• Rising marginal costs lead to rising average
  costs.
• Falling marginal costs lead to falling average
  costs.

12

OUTPUT FIXED COSTS VARIABLE COSTS
0 0
1 45
2 85
3 120
4 150
5 185
6 225
7 270
8 325
9 390
10 465
FIND TOTAL COSTS
MARGINAL COSTS
AVERAGE FIXED COSTS
AVERAGE VARIABLE
AVERAGE TOTAL
13

AVERAGE AVERAGE AVERAGE
OUTPUT FIXED VARIABLE TOTAL MARGINAL
COSTS COSTS COSTS COSTS

1 50 100
2 25 80
3 16.67 66.67
4 12.5 65
5 10 68
6 8.37 73.33
7 7.14 80
8 6.25 87.5

FIND ALL MISSING COSTS
14

AVERAGE AVERAGE AVERAGE
OUTPUT FIXED VARIABLE TOTAL MARGINAL
COSTS COSTS COSTS COSTS

1 50 100
2 25 80
3 16.67 66.67
4 12.5 65
5 10 68
6 8.37 73.33
7 7.14 80
8 6.25 87.5

FIND FIXED COSTS
VARIABLE COSTS
MARGINAL COSTS
15

OUTPUT FIXED VARIABLE TOTAL MARGINAL
COSTS COSTS COSTS COSTS

0 10
1 20
2 28
3 38
4 49
5 61
6 74

FIND FIXED COSTS
VARIABLE COSTS
MARGINAL COSTS
AVERAGE FIXED COST
AVERAGE VAR.. COST
AVERAGE TOTAL COST
16
Minimum Efficient Scale and Industry Structure

• Minimum Efficient Scale is the lowest level of
  output at which a firm can minimize long run
  average costs.

17

• Minimum efficient scale can be at very small
  levels of output, or very large levels of output,
  or anywhere in between.
• Minimum efficient scale is set by the technology
  of that industry.
• Therefore the shape of the long run average total
  cost curve is shaped by the technology of that
  industry.