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Costs Fixed, Variable and Total Costs

Costs Fixed, Variable and Total Costs. A: FIXED COSTS (FC) - Costs that do not vary with the level of output - They are present even when the output is zero - Include any debt repayments, insurance, leases and mortgages. B: VARIABLE COSTS (VC)

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Costs Fixed, Variable and Total Costs

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  1. CostsFixed, Variable and Total Costs A: FIXED COSTS (FC) - Costs that do not vary with the level of output - They are present even when the output is zero - Include any debt repayments, insurance, leases and mortgages

  2. B: VARIABLE COSTS (VC) - Costs that vary with the level of output - Includes wages, salaries, most of the utilites

  3. C: TOTAL COSTS (TC) - All fixed costs + All variable costs

  4. Average Costs A:AVERAGE FIXED COSTS AFC AFC= Fixed Costs = FC Output Q B:AVERAGE VARIABLE COSTS AVC AVC= Variable Costs = TC Output Q

  5. C: AVERAGE TOTAL COSTS ATC ATC = Total Costs = TC Output Q ATC = AFC + AVC

  6. Marginal Costs Marginal Cost = Change in total cost Change in output - TC - Q

  7. The change in output is always measured in units of one. Therefore: Marginal Cost = TC 1 Marginal Cost = TC

  8. Relationship Between Marginal and Average Costs 1) This semester’s GPA is your marginal GPA. (the most recent) 2)Your cumulative GPA is your average GPA. 3) What happens to your cumulative GPA if this semester’s GPA is greater than your average GPA?

  9. 4)  A rising marginal GPA leads to rising cumulative GPA. 5)  A rising marginal GPA leads to a rising average GPA. 6) What happens to your cumulative GPA if this semester’s GPA is worse than your cumulative GPA?

  10. 7)A falling GPA leads to a falling cumulative GPA. 8) A falling marginal GPA leads to a falling average GPA.

  11. The marginal costs drive the average costs. • Rising marginal costs lead to rising average costs. • Falling marginal costs lead to falling average costs.

  12. Minimum Efficient Scale and Industry Structure • Minimum Efficient Scale is the lowest level of output at which a firm can minimize long run average costs.

  13. Minimum efficient scale can be at very small levels of output, or very large levels of output, or anywhere in between. • Minimum efficient scale is set by the technology of that industry. • Therefore the shape of the long run average total cost curve is shaped by the technology of that industry.

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