Total Cost Curves
x
Analysis of Table and using information to graph cost curves:
¾ Suppliers = entrepreneurs ¾ Capital and labour = factors of production; these can be fixed or variable
Capital refers to equipment, machinery or anything owned by a firm that can be used in production of a good.
Labour refers to the workforce of people who produce the good.
¾ Marginal revenue = Price at which a supplier can sell a given quantity of a good ¾ Profit = total revenue – total costs
When total profit = 0, the entrepreneur is indifferent between shutting down and continuing to produce
x
Plotting the curves: ¾ To obtain a graph with total cost curves:
Plot quantity supplied against fixed cost, variable cost and total cost
Quantity Fixed variable Total cost
cost
0
100
0
100
40
100
12
112
90
100
24
124
120
100
36
136
130
100
48
148
135
100
60
160
Total Cost Curves Total Cost in $
cost
180 160 140 120 100 80 60 40 20 0 0
50
100
150
Quantity supplied Fixed cost
5
variable cost
Total cost
¾ To obtain a graph with per unit cost curves:
Plot quantity supplied against average variable cost, average total cost and average fixed cost.
¾ Marginal cost is the total cost of each additional worker employed for production of goods.
Marginal cost is a per unit cost and so is plotted along with AVC, ATC and ATC.
Quantity AVC
ATC
MC
Per Unit Cost Curves
0 40
0.3
2.8
0.3
90
0.27
1.38
0.24
120
0.3
1.13
0.4
130
0.34
1.14
1.2
135
0.44
1.19
2.4
Average cost per unit
3 2.5 2 1.5 1 0.5 0 0
50 AVC
x
100 Quantity Supplied ATC MC
Calculating Average Costs and Total Costs ¾ Finding average per unit costs of producing a given quantity:
AVC of a given quantity: draw a vertical line from quantity given on horizontal axis up to the AVC curve.
ATC of a given quantity: draw a vertical line from quantity given on horizontal axis up to the ATC curve.
MC of a given quantity: draw a vertical line from quantity given on horizontal axis up to the MC curve.
¾ Finding TOTAL COST for supplying a given quantity:
E.g. Total average cost: 1. Draw a vertical line to the ATC line 2. Drawing a horizontal line to the vertical axis 3. Calculate the area these two lines enclose
A similar method is used to find total variable cost (ATC) and total fixed cost (AFC) and total marginal cost (MC), by looking at the area enclosed.
6
150
x
Analysing the shape of the cost curves: ¾ Shape of Marginal Cost (MC) curve and its effect on ATC and AVC.
Marginal cost curve goes down initially due to specialization where each additional worker specialises to produce more goods and so the marginal cost of producing additional goods decrease.
The marginal cost curve then goes up because of fixed resources which each additional worker has to use, so then adding more workers decreases the production of goods and hence marginal cost increases
Marginal cost curve pulls the average total cost curve (ATC) and the average variable cost curve (AVC) i As long as the marginal cost is lower than the average and total costs, it will pull ATC and AVC curves down. i But when the marginal cost is higher than the average and total costs, it will pull the ATC and AVC curves upward. i Because of pulling effect, AVC and ATC both intersect MC curve at their minimum points.
¾ Short run VS Long Run:
Short run: if you shut down, your total cost of shutting down is larger than the cost of continuing to run your business and therefore you should continue to produce even if it results in a negative profit
¾ Total Profit and Profit maximising rule:
all firms should produce the quantity corresponding to where marginal cost (u – shaped curve) intersects with marginal revenue (horizontal line)
Profit = total revenue – total costs
¾ Total Revenue and Marginal Revenue:
Marginal revenue for a given quantity: 1. Draw a vertical line from the quantity given to the marginal cost curve (MC) 2. Draw a horizontal line to the vertical axis (price)
The area enclosed is the total marginal revenue of producing the given quantity.
Note: Price of Good = Marginal Revenue = Marginal Benefit.
Total revenue = Area enclosed by marginal revenue (from horizontal MC line) – Area enclosed by total cost (from ATC curve)
7
x
Firm Output Table and Maximising profit: **PRICE= $30 = MARGINAL REVENUE** Output
Variable Fixed
Total
Marginal Marginal Total
Cost
Cost
Cost
Cost
0
0
20
20
1
12
20
32
12
30
30
-2
2
22
20
42
10
30
60
18
3
27
20
47
5
30
90
43
4
40
20
60
13
30
120
60
5
60
20
80
20
30
150
70
6
100
20
120
40
30
180
60
Revenue
Revenue
-
-
-
Profit -
¾ The goal of every firm is to maximise profit. ¾ Each unit of good sells for $30 and so the revenue for each marginal unit of good sold is just $30. ¾ REVENUE IS DIFFERENT TO PROFIT ¾ Revenue = Price x Quantity of Goods Sold
i.e. marginal benefit of each unit of good sold
¾ Profit = Total Revenue – Total Costs
i.e. difference between how much is gained and how much is lost
¾ What is the profit maximising quantity?
From the table, producing 5 units of the good maximises the profit.
However, this does NOT mean the firm should ONLY produce 5 units.
Producing 2, 3, 4 and 6 units still results in profit.
¾ What is the total revenue at the profit maximising quantity?
Profit maximising quantity is 5.
Price of good is $30.
Total revenue = $30 x 5 = $150
¾ How much is the profit?
Profit = Total revenue – Total cost = $150 - $80 = $70
8
2.3 x
From a Discrete to a Continuous Model Definitions: ¾ Horizontal price line = marginal revenue (i.e. price of a given quantity of goods)
To determine the quantity of goods a firm is willing to supply for a given price: (marginal revenue): 1. Draw a horizontal line from the price to the marginal cost curve 2. Then drop downwards to the x- axis.
¾ Short term shut down condition: firm should shut down in the short term if:
The marginal revenue is below the minimum point of the average variable cost (AVC) curve
E.g. you are losing money with the upkeep of paying for workers’ wages (variable cost) but this loss is still lower than if you shut down completely and had to repay loans without any revenue
¾ Shut down condition in the long run: firm should shut down in the long run if:
The marginal revenue is below the minimum point of the average total cost curve (ATC) (revenue isn’t enough to pay for fixed + variable costs)
¾ Shut downs occur when price of the goods is too low for the supplier to generate enough revenue to pay for costs. x
Aspects of a supply curve: 1. Supply curve can be derived by changing the price of goods and observing the variation in quantity produced.
9
Analysis of Table and using information to graph cost curves:
¾ Suppliers = entrepreneurs ¾ Capital and labour = factors of production; these can be fixed or variable
Capital refers to equipment, machinery or anything owned by a firm that can be used in production of a good.
Labour refers to the workforce of people who produce the good.
¾ Marginal revenue = Price at which a supplier can sell a given quantity of a good ¾ Profit = total revenue – total costs
When total profit = 0, the entrepreneur is indifferent between shutting down and continuing to produce
x
Plotting the curves: ¾ To obtain a graph with total cost curves:
Plot quantity supplied against fixed cost, variable cost and total cost
Quantity Fixed variable Total cost
cost
0
100
0
100
40
100
12
112
90
100
24
124
120
100
36
136
130
100
48
148
135
100
60
160
Total Cost Curves Total Cost in $
cost
180 160 140 120 100 80 60 40 20 0 0
50
100
150
Quantity supplied Fixed cost
5
variable cost
Total cost
¾ To obtain a graph with per unit cost curves:
Plot quantity supplied against average variable cost, average total cost and average fixed cost.
¾ Marginal cost is the total cost of each additional worker employed for production of goods.
Marginal cost is a per unit cost and so is plotted along with AVC, ATC and ATC.
Quantity AVC
ATC
MC
Per Unit Cost Curves
0 40
0.3
2.8
0.3
90
0.27
1.38
0.24
120
0.3
1.13
0.4
130
0.34
1.14
1.2
135
0.44
1.19
2.4
Average cost per unit
3 2.5 2 1.5 1 0.5 0 0
50 AVC
x
100 Quantity Supplied ATC MC
Calculating Average Costs and Total Costs ¾ Finding average per unit costs of producing a given quantity:
AVC of a given quantity: draw a vertical line from quantity given on horizontal axis up to the AVC curve.
ATC of a given quantity: draw a vertical line from quantity given on horizontal axis up to the ATC curve.
MC of a given quantity: draw a vertical line from quantity given on horizontal axis up to the MC curve.
¾ Finding TOTAL COST for supplying a given quantity:
E.g. Total average cost: 1. Draw a vertical line to the ATC line 2. Drawing a horizontal line to the vertical axis 3. Calculate the area these two lines enclose
A similar method is used to find total variable cost (ATC) and total fixed cost (AFC) and total marginal cost (MC), by looking at the area enclosed.
6
150
x
Analysing the shape of the cost curves: ¾ Shape of Marginal Cost (MC) curve and its effect on ATC and AVC.
Marginal cost curve goes down initially due to specialization where each additional worker specialises to produce more goods and so the marginal cost of producing additional goods decrease.
The marginal cost curve then goes up because of fixed resources which each additional worker has to use, so then adding more workers decreases the production of goods and hence marginal cost increases
Marginal cost curve pulls the average total cost curve (ATC) and the average variable cost curve (AVC) i As long as the marginal cost is lower than the average and total costs, it will pull ATC and AVC curves down. i But when the marginal cost is higher than the average and total costs, it will pull the ATC and AVC curves upward. i Because of pulling effect, AVC and ATC both intersect MC curve at their minimum points.
¾ Short run VS Long Run:
Short run: if you shut down, your total cost of shutting down is larger than the cost of continuing to run your business and therefore you should continue to produce even if it results in a negative profit
¾ Total Profit and Profit maximising rule:
all firms should produce the quantity corresponding to where marginal cost (u – shaped curve) intersects with marginal revenue (horizontal line)
Profit = total revenue – total costs
¾ Total Revenue and Marginal Revenue:
Marginal revenue for a given quantity: 1. Draw a vertical line from the quantity given to the marginal cost curve (MC) 2. Draw a horizontal line to the vertical axis (price)
The area enclosed is the total marginal revenue of producing the given quantity.
Note: Price of Good = Marginal Revenue = Marginal Benefit.
Total revenue = Area enclosed by marginal revenue (from horizontal MC line) – Area enclosed by total cost (from ATC curve)
7
x
Firm Output Table and Maximising profit: **PRICE= $30 = MARGINAL REVENUE** Output
Variable Fixed
Total
Marginal Marginal Total
Cost
Cost
Cost
Cost
0
0
20
20
1
12
20
32
12
30
30
-2
2
22
20
42
10
30
60
18
3
27
20
47
5
30
90
43
4
40
20
60
13
30
120
60
5
60
20
80
20
30
150
70
6
100
20
120
40
30
180
60
Revenue
Revenue
-
-
-
Profit -
¾ The goal of every firm is to maximise profit. ¾ Each unit of good sells for $30 and so the revenue for each marginal unit of good sold is just $30. ¾ REVENUE IS DIFFERENT TO PROFIT ¾ Revenue = Price x Quantity of Goods Sold
i.e. marginal benefit of each unit of good sold
¾ Profit = Total Revenue – Total Costs
i.e. difference between how much is gained and how much is lost
¾ What is the profit maximising quantity?
From the table, producing 5 units of the good maximises the profit.
However, this does NOT mean the firm should ONLY produce 5 units.
Producing 2, 3, 4 and 6 units still results in profit.
¾ What is the total revenue at the profit maximising quantity?
Profit maximising quantity is 5.
Price of good is $30.
Total revenue = $30 x 5 = $150
¾ How much is the profit?
Profit = Total revenue – Total cost = $150 - $80 = $70
8
2.3 x
From a Discrete to a Continuous Model Definitions: ¾ Horizontal price line = marginal revenue (i.e. price of a given quantity of goods)
To determine the quantity of goods a firm is willing to supply for a given price: (marginal revenue): 1. Draw a horizontal line from the price to the marginal cost curve 2. Then drop downwards to the x- axis.
¾ Short term shut down condition: firm should shut down in the short term if:
The marginal revenue is below the minimum point of the average variable cost (AVC) curve
E.g. you are losing money with the upkeep of paying for workers’ wages (variable cost) but this loss is still lower than if you shut down completely and had to repay loans without any revenue
¾ Shut down condition in the long run: firm should shut down in the long run if:
The marginal revenue is below the minimum point of the average total cost curve (ATC) (revenue isn’t enough to pay for fixed + variable costs)
¾ Shut downs occur when price of the goods is too low for the supplier to generate enough revenue to pay for costs. x
Aspects of a supply curve: 1. Supply curve can be derived by changing the price of goods and observing the variation in quantity produced.
9
