Indicate how each of the following would shift the (1) marginal-cost curve, (2) average-variable

Indicate how each of the following would shift the (1)...

Key Concepts

Cost Structure - Fixed and Variable Costs

This concept refers to the classification of a firm's costs into fixed costs, which remain constant regardless of production levels, and variable costs, which change with the quantity of output produced. Understanding this distinction is crucial because the different nature of the costs causes them to affect various cost curves in distinct ways when external factors (such as changes in input prices or taxes) alter them.

Marginal Cost Curve (MC)

The marginal cost curve shows the additional cost incurred by producing one extra unit of output. It is highly sensitive to changes in variable costs because each incremental unit typically requires additional resources. Shifts in factors like wages or energy prices directly influence the marginal cost, altering the shape and position of the MC curve.

Average Fixed Cost Curve (AFC)

The average fixed cost curve is derived by spreading fixed costs over the units produced. Since fixed costs do not vary with output, the AFC curve is shifted by changes in the level of fixed expenses, such as reductions in property taxes or increases in fixed insurance costs. Importantly, these shifts affect the entire AFC curve uniformly across all output levels.

Average Variable Cost Curve (AVC)

The average variable cost curve represents the variable costs per unit of output, calculated by dividing total variable costs by the quantity produced. Changes in inputs such as wages, electricity, or transportation expenses—which alter variable costs—result in shifts of the AVC curve either upward or downward, affecting the cost per unit of production.

Average Total Cost Curve (ATC)

The average total cost curve combines both average fixed costs and average variable costs, giving the overall cost per unit of production. Since it includes both fixed and variable elements, any change in either type of cost, whether from adjustments in taxes, wages, or other input prices, will shift the ATC curve. Its movement reflects the weighted influence of shifts in both cost categories.

Transcript

00:01 So we're to indicate how each of the following will shift the marginal cost curve, the average variable cost curve.

00:12 The marginal cost curve, the average variable cost curve, the average fixed cost curve, and the average total cost curve.

00:53 So in each case, specify the direction of the shifts.

00:57 So the first thing is a reduction in the business property taxes.

01:03 So if you have a reduction in a business property tax, a reduction in business property taxes.

01:21 A reduction in business property taxes is obviously a fixed cost.

01:28 So now, because a fixed cost, it would therefore change the average, because it's reducing the property taxes.

01:37 It will therefore change the average fixed costs and the average fixed costs therefore shits down so it's a fixed cost and you're reducing a fixed cost that means the average fixed cost would shits down so and the average total costs will also shit down so we can say that the marginal cost curve will have no change because it's not additional cost is a fixed cost so this will have no change the average variable costs will have no change to it's not a variable cost but the average fixed cost and the average total cost this bolts will shift down now moving on to the second question an increase in the nominal wages of production workers so you're increasing nominal wages of production workers right so therefore this is a variable cost because it's an additional increase so it's a variable costs and because it's a variable cost it will therefore affect the marginal cost because marginal cost is an increase it's therefore affect the average variable cost and also the average total cost because we know the average total cost is the additional of the marginal the variable cost and the total cost so we can say that marginal cost because of the addition and increase marginal cost curve will shift up we can see that the average very cost will shift up and the average fixed costs will have no change because it is fixed while the average total cost will also shift up so moving on to the third one this is a decrease in the price of electricity a decrease in the price of electricity is a variable cost because you are decreasing the price as already said so therefore it will change marginal cost the average variable cost and also the average total cost so as usual, the marginal costs will shift up, the average variable costs will shift down, the average fixed cost will have no change, and the average total cost will shift down.

05:25 So that's that...

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