Overview
This lecture explains how fixed and variable cost changes impact marginal cost, average variable cost, average fixed cost, and average total cost curves, and how these relationships are visualized.
Cost Curves Overview
- Average fixed cost (AFC) decreases and approaches zero as output increases.
- Marginal cost (MC) curve is typically U-shaped, intersecting minimum points of AVC and ATC.
- The vertical gap between average total cost (ATC) and average variable cost (AVC) equals average fixed cost (AFC).
- As AFC decreases, ATC and AVC curves get closer and converge over time.
Effects of Changes in Fixed Costs
- An increase in fixed costs (e.g., higher rent) shifts the AFC curve upward.
- The ATC curve also shifts up by the same amount as AFC for each output level.
- Changes in fixed costs do not affect AVC or MC, since these costs are not part of variable or marginal computations.
Effects of Changes in Variable Costs
- An increase in variable costs (e.g., wage increases) shifts the AVC curve upward.
- The MC curve also shifts upward when variable costs increase.
- Upward shifts in AVC and MC also result in an upward shift in ATC.
- Fixed cost curves (AFC) remain unchanged with variable cost changes.
Visual Connections and Curve Intersections
- MC intersects both AVC and ATC at their lowest (minimum) points.
- The point where ATC and AVC curves get closer corresponds to AFC approaching zero as output increases.
Key Terms & Definitions
- Average Fixed Cost (AFC) — Fixed costs divided by quantity of output, decreases as output increases.
- Average Variable Cost (AVC) — Variable costs divided by quantity of output, forms part of total cost.
- Average Total Cost (ATC) — Sum of average fixed and average variable costs per unit of output.
- Marginal Cost (MC) — The cost of producing one additional unit of output.
Action Items / Next Steps
- Review how cost curve shifts affect firm decisions on production.
- Practice sketching the impact of fixed and variable cost changes on all cost curves.