Say a firm has 100 in fixed costs and its average variable costs increase by 5 for each unit,

Say a firm has 100 in fixed costs and its average variable...

Key Concepts

Cost Curve Shapes

Cost curve shapes, such as those for AFC, AVC, ATC, and MC, are fundamental to understanding production behavior. Typically, the AFC declines with output, while the AVC and ATC might display U-shaped curves due to efficiencies at lower production levels and diseconomies of scale at higher outputs. Marginal cost curves often intersect the average cost curves at their minimum points, a concept that is key in cost analysis and pricing strategies.

Fixed Costs

Fixed costs refer to expenses that do not change with the level of output produced. They remain constant regardless of how much or how little a firm produces over a given period, and they have a critical role in determining other cost measures like average fixed cost, which decreases as output increases.

Variable Costs

Variable costs are expenses that vary directly with the production level. As a firm produces more units, the total variable costs increase. Understanding variable costs is essential because they directly affect both the calculation of average variable cost and the marginal cost of production.

Average Fixed Cost (AFC)

Average fixed cost is calculated by dividing the total fixed costs by the number of units produced. Since fixed costs are constant, AFC decreases as output increases, making it a declining function which is an important characteristic in cost analysis.

Average Variable Cost (AVC)

Average variable cost is determined by dividing the total variable costs by the number of output units. It reflects the variable cost per unit and is particularly important in understanding production efficiency and pricing strategies, while also informing the behavior of the average total cost.

Average Total Cost (ATC)

Average total cost represents the sum of average fixed cost and average variable cost for each unit of output. This measure provides insight into the overall per unit cost of production and is crucial for determining the minimum production levels needed to cover costs and achieve profitability.

Marginal Cost (MC)

Marginal cost is the additional cost incurred when producing one more unit of output. It is derived from changes in total cost and is vital in decision-making, as it helps determine the optimal level of production where the cost of producing one more unit equals the revenue generated from it.

Transcript

00:01 So this question says that a firm has a fixed cost for $60 and the total cost is, and the variable cost as indicated in table at the top of the next page, i will be drawing a table.

00:19 So we're asked to complete the table and check our calculations by referring to problem 4 at the end of chapter 10.

00:27 So the first question was to grab the total fixed cost, the total fixed cost, total variable cost, and total cost and explain how the law of diminution returns influences the shapes of the variable cost and a total cost curves so we're going to be doing that first so total fixed cost is 60 right and total cost is calculated by total cost is calculated by summing the total fixed cost plus total variable cost so total cost is total fixed cost plus total variable costs and average fixed cost is equal to total fixed cost divided by total product average total product i'm sorry about this so average variable cost is equal to total variable cost divided by total product and average total cost is equal to total cost divided by total product and marginal cost is equal to total cost nt unit minus total cost and minus one unit divided by one so now we're going to draw the table now that we have all the formulas so we're going to start with total product here right then okay now we have total product fixed costs, we have variable costs, we have total cost, we have average fixed costs, we have average variable cost, we have average total cost, and we have marginal costs.

03:28 Then we fill the total product we want to 10.

03:33 0 1 2 3 4 5 6 7 8 9 10 now we draw the table down so from there we can solve it so we have all the formulas so that makes it easy to find to solve it we had the total fixed cost already so then we fill in the table and the fixed cost is 60 so we just feel that in so because of the formulas we have, it easy to, you know, find everything else.

08:15 And this is how, this is the finishing of the table.

08:18 Once you have the formula, it's honestly easy to find the rest.

08:23 So now we're going to be drawing the graph because the question also wants us to graph what we just found out.

08:31 So, yeah, we're going to be drawing the graph.

08:51 So this is our cost and the output.

08:56 And we have 50 ,00 up to 500, right? so this is the total fixed cost and this is the output over here.

10:31 And this is going to be 1 to 10, 1 to 10, 3, 4, 6, 7, 8, 9, 10.

10:43 And then this is 100 to 500.

10:45 So we're going to be having a point at one and going to be having a point here.

10:55 We're going to be having a point at 1 at 50.

11:00 50 is right here.

11:02 So 1 and 50.

11:04 We're going to be having a point at the total fixed cost and this right here.

11:13 It's going to be having a point at 2 and almost at 100.

11:18 Right here.

11:19 We're going to be having a point at 100 and 2.

11:26 About right here, we're going to be having a point at 3 and.

11:31 So basically this is how the line should go.

11:33 One would be, we're going to be using a green line to draw, a green to draw this one.

11:44 So it should look like this and go this and then go to this.

12:04 I'm going to go like this and then 3 and almost at 1 .15.

12:10 You should go like this then 4 and almost at 150 should go like this then 5 and almost at 200 so this should connect then 6 at almost at 200 then 7 at almost at 300 8 at almost at 350 then we have 9 almost add 400 and 10 almost adds 450 so this is how this line should connect and this would be the total variable cost right and then the second line would be the total cost so for the total cost it should be something like this it should follow you right at both and be something like this then come right like this so this will be the total cost.

14:31 It would be better if you're drawing it on the paper that way to be easier.

14:37 But this is what the graph should look like.

14:40 And this shows graphically the fixed cost, as you can see, the variable cost and the total cost data.

14:49 The total variable cost cvc is measured vertically, as you can see, vertically...

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