CH APTER
8: Sh
ort -Ru
n Co
sts an
d
Out put
Decisi on
s
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 16 of 31
Average Variable Cost AVC
q TVC
AVC
average variable cost AVC Total variable
cost divided by the number of units of output.
CH APTER
8: Sh
ort -Ru
n Co
sts an
d
Out put
Decisi on
s
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 17 of 31
Marginal cost is the cost of one additional unit. Average variable cost is the total variable cost divided by the total number of units produced.
TABLE 8.4 Short-Run Costs of a Hypothetical Firm
1 q
2 TVC
3 MC
TVC 4
AVC TVCq
5 TFC
6 TC
TVC + TFC 7
AFC TFCq
8 ATC
TCq or AFC + AVC
1,000 1,000
1 10
10 10
1,000 1,010
1,000 1,010
2 18
8 9
1,000 1,018
500 509
3 24
6 8
1,000 1,024
333 341
4 32
8 8
1,000 1,032
250 258
5 42
10 8.4
1,000 1,042
200 208.4
500 8,000
20 16
1,000 9,000
2 18
CH APTER
8: Sh
ort -Ru
n Co
sts an
d
Out put
Decisi on
s
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 18 of 31
Marginal cost intersects average variable cost at the lowest, or minimum, point of AVC.
Graphing Average Variable Costs and Marginal Costs
FIGURE 8.6 More Short-Run Costs
CH APTER
8: Sh
ort -Ru
n Co
sts an
d
Out put
Decisi on
s
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 19 of 31
FIGURE 8.7 Total Cost = Total Fixed Cost + Total Variable Cost
TOTAL COSTS
CH APTER
8: Sh
ort -Ru
n Co
sts an
d
Out put
Decisi on
s
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 20 of 31
average total cost ATC Total cost
divided by the number of units of output.
Average Total Cost ATC
q TC
ATC
AVC AFC
ATC
CH APTER
8: Sh
ort -Ru
n Co
sts an
d
Out put
Decisi on
s
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 21 of 31
FIGURE 8.8 Average Total Cost = Average
Variable Cost + Average Fixed Cost
CH APTER
8: Sh
ort -Ru
n Co
sts an
d
Out put
Decisi on
s
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 22 of 31
The Relationship Between Average Total Cost and Marginal Cost
If marginal cost is below average total cost, average total cost will decline toward marginal cost. If marginal cost is above average total cost, average total cost will increase. As a
result, marginal cost intersects average total cost at ATC’s minimum point, for the same reason that it intersects the average variable cost curve at its minimum point.
The relationship between average total cost and marginal cost is exactly the same as the relationship
between average variable cost and marginal cost.
CH APTER
8: Sh