00:01
So here we're talking about costs.
00:02
So first let me reproduce the diagram on screen, quantity and price.
00:08
And we are thinking about competition.
00:12
Competition says that the price is fixed, first of all.
00:16
So i'm going to draw the price curve as a horizontal line.
00:21
In competition, the individual firm doesn't affect the price.
00:24
So as they produce more, price is constant, right? that's the market price.
00:28
We now need to introduce three more things.
00:32
Average variable cost, average total cost, and marginal cost.
00:38
And marginal cost is the cost of one more.
00:43
Average variable cost is variable cost over q, and average total cost is total cost over q, right? so average variable cost usually looks something like this.
00:56
Average variable cost, right? the idea being is that average variable cost eventually runs into diminishing returns, right? as the company tries to produce more and more and more, it gets harder and harder and harder for it to do so, and it becomes more and more and more costly.
01:18
Average total cost is then average variable cost plus fixed cost, over q.
01:29
So average cost is total cost is going to get closer and closer and closer to variable cost because this is going to go to zero as the firm produces more and more and more.
01:40
So average total cost is going to look, let me try to see if i can draw that a bit more smoothly.
01:48
I shouldn't know, right? it will look something like this.
01:56
You see how that gap is getting smaller and smaller and smaller and smaller and smaller...