Short Run Cost Curves | Think Econ

Summary

In this video, we explore cost curves in microeconomics, focusing on per-unit costs like marginal cost (MC), average variable cost (AVC), average fixed cost (AFC), and average total cost (ATC). The video explains how to graph these curves, read them, and use them to calculate total costs. It covers the relationships between the curves, such as how MC intersects AVC and ATC at their minimum points. Viewers learn to interpret and calculate costs at various output levels, with practical examples and clear step-by-step guidance for understanding cost structures in firms.

Takeaways

• 😀 Total fixed cost (TFC) is represented as a horizontal line on the graph, indicating it remains constant regardless of output.
• 😀 Total variable cost (TVC) increases steeply as output increases, reflecting higher production costs per additional unit.
• 😀 Total cost (TC) is the sum of total fixed cost and total variable cost, and it starts at the level of the total fixed cost.
• 😀 Average fixed cost (AFC) decreases as quantity increases because the fixed cost is divided by a larger number of units.
• 😀 Marginal cost (MC) initially decreases, then sharply increases due to diminishing returns to scale.
• 😀 Average variable cost (AVC) takes a U-shape on the graph and intersects the marginal cost curve at its minimum point.
• 😀 When marginal cost (MC) is below average variable cost (AVC), AVC is decreasing, and when MC is above AVC, AVC is increasing.
• 😀 Average total cost (ATC) is the sum of average fixed cost (AFC) and average variable cost (AVC), sitting above the AVC curve.
• 😀 Marginal cost intersects the average total cost curve at its minimum, and similar principles apply: when MC < ATC, ATC is decreasing; when MC > ATC, ATC is increasing.
• 😀 You can calculate total cost by multiplying the average total cost (ATC) by the quantity (Q), as seen in the example where 36 x 6 = 216 dollars.
• 😀 Total variable cost (TVC) and total fixed cost (TFC) can be calculated by multiplying their respective average costs by quantity (Q), and their sum should equal total cost (TC), as demonstrated in the example where TVC + TFC = TC.

Q & A

What are the main types of cost curves discussed in the video?

The video focuses on six main cost curves: Total Fixed Cost (TFC), Total Variable Cost (TVC), Total Cost (TC), Average Fixed Cost (AFC), Average Variable Cost (AVC), and Average Total Cost (ATC), as well as Marginal Cost (MC).

How is Total Fixed Cost represented on a graph?

Total Fixed Cost is represented as a horizontal line on the graph, set at a fixed value (e.g., $100), because it does not change with the level of output.

What happens to Total Variable Cost as output increases?

Total Variable Cost increases steeply as output increases, reflecting the rising costs associated with producing more units.

How do Total Fixed Cost and Total Variable Cost relate to Total Cost?

Total Cost is the sum of Total Fixed Cost and Total Variable Cost. The Total Cost curve starts at the same y-intercept as the Total Fixed Cost, and their slopes are similar.

Why does Average Fixed Cost decrease as quantity increases?

Average Fixed Cost decreases as quantity increases because the fixed cost is being spread over more units. Since the total fixed cost remains constant, dividing it by an increasing quantity results in a smaller per-unit cost.

What is the shape of the Marginal Cost curve, and why does it behave this way?

The Marginal Cost curve initially decreases, then sharply increases due to diminishing returns. This happens because as more units are produced, the additional cost of production per unit increases after a certain point.

How does the Average Variable Cost curve behave on a graph?

The Average Variable Cost curve takes a U-shape and intersects the Marginal Cost curve at its minimum point. This signifies that when the Marginal Cost is below the Average Variable Cost, the Average Variable Cost is decreasing, and when it is above, the AVC is increasing.

What does the Average Total Cost curve represent?

The Average Total Cost curve represents the sum of Average Fixed Cost and Average Variable Cost. It generally mirrors the shape of the AVC curve but sits slightly higher, reflecting the inclusion of the AFC.

How can you find the Marginal Cost for a specific quantity on the graph?

To find the Marginal Cost at a given quantity, locate the quantity on the x-axis, trace upward to the Marginal Cost curve, and then move horizontally to the y-axis to read the value.

How do you calculate Total Cost using Average Total Cost?

Total Cost can be calculated by multiplying Average Total Cost (ATC) by the quantity (Q). For example, if ATC is $36 and Q is 6, the total cost would be $36 * 6 = $216.

How do you calculate Total Variable Cost and Total Fixed Cost using Average Costs?

Total Variable Cost is calculated by multiplying Average Variable Cost (AVC) by quantity (Q). Similarly, Total Fixed Cost is calculated by multiplying Average Fixed Cost (AFC) by quantity (Q). For example, if AVC is $28 and Q is 6, TVC is $28 * 6 = $168, and if AFC is $8 and Q is 6, TFC is $8 * 6 = $48.