Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 13 of 36 – The Costs of Production 

Section 16 of 23

…

Table 2a here

…

Figure 4 here

…

Figure 4 - Conrad's Average Cost and Marginal Cost Curves

Marginal cost MC is

· the increase in total cost TC

· that occurs when producing an additional unit of output quantity Q

· MC always = ΔTC

Average total cost ATC is the cost of one unit of output, TC/Q

…

Figure 4 shows for Conrad's Coffee Shop

· Average Total Cost (ATC)

· Average Fixed Cost (AFC)

· Average Variable Cost (AVC)

· Marginal Cost (MC)

These curves are drawn by graphing the Table 2a data.

These cost curves show three features typical of many firms

· MC rises with the quantity of output

· ATC curve is U-shaped

· MC curve crosses the ATC curve at the minimum of ATC, on Table 2a $1.30 at quantity of 5 produced

…

Graphs of average costs and marginal cost are useful when analyzing firm behavior.

Figure 4 is a graph of Conrad's costs from Table 2a data.

· the horizontal axis shows the quantity of output the firm produces

· the vertical axis shows costs

The graph plots four cost curves

· Average Total Cost (ATC)

· Average Fixed Cost (AFC)

· Average Variable Cost (AVC)

· Marginal Cost (MC)

For example, at 5 cups of coffee per hour

ATC = $1.30

AFC = $0.60

AVC = $0.70

MC = $1.20

We will examine three main features

· shape of the MC curve

· shape of the ATC curve

· relationship between MC and ATC

… …


 

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