Microeconomics exam revision notes

XVII. Cost curves
XVII. a. Definitions
- Total cost curve = graph of firm’s total cost function
- Variable cost curve = graph of firm’s variable cost function
- Average total cost curve = graph of firm’s average total cost function
- F = total cost of firm’s short-run fixed inputs
o F ≠ varying depending on firm’s output
- c v ( y ) = total cost of firm’s variable inputs when producing y output units = firm’s
variable cost function
- c ( y ) = total cost of all inputs (fixed & variable) when producing y output units =
firm’s total cost function
c ( y )=F+ c v ( y )




TC F c v ( y)
- For y > 0: firm’s average total cost function = = + = AFC ( y )+ AVC ( y)
y y y
F
- Average fixed cost curve: AFC ( y )=
y




- Note: in short-run with fixed amount of at least one input  Law of Diminishing
(Marginal) Returns applying causing eventual increase in firm’s average variable
cost of production
XVII. b. Relationships between the cost curves

, - ATC(y) = AFC(y) + AVC(y)




- AVC(y) eventually increasing  ATC(y) eventually increasing




∂ c v ( y) ∂ c ( y )
- Marginal cost function: MC ( y )= = since firm’s total cost function =
∂y ∂y
c ( y )=F+ c v ( y ) & F ≠ changing with output level y