Costs

Short-run costs
Total cost
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
Output
(Q)

0
1
2
3
4
5
6
7
TFC
()

12
12
12
12
12
12
12
12
Total costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TFC
Output
(Q)

0
1
2
3
4
5
6
7
TFC
()

12
12
12
12
12
12
12
12
Total costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TFC
Output
(Q)

0
1
2
3
4
5
6
7
TFC
()

12
12
12
12
12
12
12
12
TVC
()

0
10
16
21
28
40
60
91
Total costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
Output
(Q)

0
1
2
3
4
5
6
7
TFC
()

12
12
12
12
12
12
12
12
TVC
()

0
10
16
21
28
40
60
91
TFC
Total costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
TFC
Diminishing marginal
returns set in here
Total costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
Output
(Q)

0
1
2
3
4
5
6
7
TFC
()

12
12
12
12
12
12
12
12
TVC
()

0
10
16
21
28
40
60
91
TFC
Total costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TVC
TFC
Output
(Q)

0
1
2
3
4
5
6
7
TFC
()

12
12
12
12
12
12
12
12
TVC
()

0
10
16
21
28
40
60
91
TC
()

12
22
28
33
40
52
72
103
Total costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TC
Output
(Q)

0
1
2
3
4
5
6
7
TFC
()

12
12
12
12
12
12
12
12
TVC
()

0
10
16
21
28
40
60
91
TC
()

12
22
28
33
40
52
72
103
TVC
TFC
Total costs for firm X
0
20
40
60
80
100
0 1 2 3 4 5 6 7 8
TC
TVC
TFC
Diminishing marginal
returns set in here
Total costs for firm X
Short-run costs
Marginal cost
= TC / Q
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7
Deriving marginal costs
Q TC MC
0 12
1 22
2 28
3 33
4 40
5 52
6 72
7 103
10
6
5
7
12
20
31
Q
Costs ()
TC
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7
Q TC MC
0 12
1 22
2 28
3 33
4 40
5 52
6 72
7 103
10
6
5
7
12
20
31
Q
Costs ()
Deriving marginal costs
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7
Q TC MC
0 12
1 22
2 28
3 33
4 40
5 52
6 72
7 103
10
6
5
7
12
20
31
TC
TC = 12
Q = 1
Q
Costs ()
Deriving marginal costs
TC
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7
MC
Diminishing
returns set
in here
Q
Costs ()
Q TC MC
0 12
1 22
2 28
3 33
4 40
5 52
6 72
7 103
10
6
5
7
12
20
31
Deriving marginal costs
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
MC
Q
Costs ()
Diminishing marginal
returns set in here
Deriving marginal costs
Short-run costs
Average cost
= TC / Q
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q
Costs ()
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TVC AVC
0 0 -
1 10 10
2 16 8
3 21 7
4 28 7
5 40 8
6 60 10
7 91 13
Q
Costs ()
AFC
3
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TVC AVC
0 0 -
1 10 10
2 16 8
3 21 7
4 28 7
5 40 8
6 60 10
7 91 13
Q
Costs ()
AFC
AVC
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC AC
0 12
1 22 22
2 28 14
3 33 11
4 40 10
5 52 10.4
6 72 12
7 103 14.7
Q
Costs ()
AFC
AVC
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC AC
0 12
1 22 22
2 28 14
3 33 11
4 40 10
5 52 10.4
6 72 12
7 103 14.7
Q
Costs ()
AC
AFC
AVC
Short-run costs
The relationship
between average
and marginal cost
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC MC
0 12
1 22
2 28
3 33
4 40
5 52
6 72
7 103
10
6
5
7
12
20
31
Q
Costs ()
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
MC
Q TC MC
0 12
1 22
2 28
3 33
4 40
5 52
6 72
7 103
10
6
5
7
12
20
31
Q
Costs ()
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC MC AC
0 12
1 22
2 28
3 33
4 40
5 52
6 72
7 103
10
6
5
7
12
20
31
MC
-
22
14
11
10
10.4
12
14.7
Q
Costs ()
0
5
10
15
20
25
30
35
0 1 2 3 4 5 6 7
Q TC MC AC
0 12
1 22
2 28
3 33
4 40
5 52
6 72
7 103
10
6
5
7
12
20
31
MC
-
22
14
11
10
10.4
12
14.7
Q
Costs ()
AC
Output (Q)
C
o
s
t
s

(

)

AFC
AVC
MC
x
AC
z
y
Average and marginal costs
Short-run costs
Short-run costs
when fixed factors
are divisible
Output
O
C
o
s
t
s

AVC
Cost curves in practice
Output
O
C
o
s
t
s

AVC
MC
Cost curves in practice
Long-run costs
Long-run costs
= TC / Q
Alternative long-run average cost curves
Output
O
C
o
s
t
s

LRAC
Economies of Scale
Output
O
C
o
s
t
s

LRAC
Diseconomies of Scale
Alternative long-run average cost curves
Output
O
C
o
s
t
s

LRAC
Constant costs
Alternative long-run average cost curves
A typical long-run average cost curve
Output
O
C
o
s
t
s

LRAC
Output
O
C
o
s
t
s

LRAC
Economies
of scale
Constant
costs
Diseconomies
of scale
A typical long-run average cost curve
Long-run average and marginal costs
Output
O
C
o
s
t
s

LRAC
LRMC
Economies of Scale
Output
O
C
o
s
t
s

LRAC
LRMC
Diseconomies of Scale
Long-run average and marginal costs
Output
O
C
o
s
t
s

LRAC = LRMC
Constant costs
Long-run average and marginal costs
Output
O
C
o
s
t
s

LRMC
LRAC
Long-run average and marginal costs
Initial economies of scale,
then diseconomies of scale
Long-run costs
Relationship between
short-run and long-run
average cost curves
Deriving long-run average cost curves: factories of fixed size
SRAC
3
C
o
s
t
s

Output
O
SRAC
4
SRAC
5
5 factories
4 factories
3 factories
2 factories
1 factory
SRAC
1
SRAC
2
SRAC
1
SRAC
3
SRAC
2
SRAC
4
SRAC
5
LRAC
C
o
s
t
s

Output
O
Deriving long-run average cost curves: factories of fixed size
C
o
s
t
s

Output
O
Examples of short-run
average cost curves
Deriving long-run average cost curves: choice of factory size
LRAC
C
o
s
t
s

Output
O
Deriving long-run average cost curves: choice of factory size
Long-run costs
Deriving an LRAC curve
from an isoquant map
U
n
i
t
s

o
f

c
a
p
i
t
a
l

(
K
)

O
Units of labour (L)
100
200
At an output of 200
LRAC = TC
2
/ 200
Deriving an LRAC curve from an isoquant map
U
n
i
t
s

o
f

c
a
p
i
t
a
l

(
K
)

O
Units of labour (L)
100
200
300
400
500
600
700
Note: increasing returns
to scale up to 400 units;
decreasing returns to
scale above 400 units
Deriving an LRAC curve from an isoquant map
U
n
i
t
s

o
f

c
a
p
i
t
a
l

(
K
)

O
Units of labour (L)
100
200
300
400
500
600
700
Expansion path
Deriving an LRAC curve from an isoquant map
Long-run and short-run costs
Deriving both long-run and
short-run average cost curves
from an isoquant map
U
n
i
t
s

o
f

c
a
p
i
t
a
l

(
K
)

O
Units of labour (L)
Deriving long-run costs from an isoquant map
100
200
300
TC =
20 000
TC =
40 000
TC =
60 000
L
1
L
2
K
2
K
1
Expansion path
a
b

K
1
K
1
Expansion path
U
n
i
t
s

o
f

c
a
p
i
t
a
l

(
K
)

O
Units of labour (L)
Deriving short-run costs from an isoquant map
100
200
300
TC =
20 000
TC =
40 000
TC =
60 000
TC =
66 000
TC =
22 000
L
1
L
3
L
2
K
2
a
b

c