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Managerial Economics & Business Strategy

Managerial Economics & Business Strategy. Chapter 5 The Production Process and Costs. MC. $. ATC. AVC. AFC. Q. Some Definitions. Average Total Cost ATC = AVC + AFC ATC = C(Q)/Q Average Variable Cost AVC = TVC(Q)/Q AVC =ATC-AFC Average Fixed Cost AFC = TFC/Q AFC = ATC-AVC

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Managerial Economics & Business Strategy

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  1. Managerial Economics & Business Strategy Chapter 5 The Production Process and Costs

  2. MC $ ATC AVC AFC Q Some Definitions • Average Total Cost • ATC = AVC + AFC • ATC = C(Q)/Q • Average Variable Cost • AVC = TVC(Q)/Q • AVC =ATC-AFC • Average Fixed Cost • AFC = TFC/Q • AFC = ATC-AVC • Marginal Cost • MC = DTC/DQ • MC = DTVC/DQ MR

  3. Some things to notice • Average-Marginal Rule • When the MC lies below the AVC and ATC the average curves are falling • When the MC lies above the AVC and ATC the average curves are rising • MC intersects the AVC and ATC at their minimum points

  4. A question…. • Why does the AVC and ATC grow closer together as we increase Q? • AFC is declining • ATC = AFC + AVC • Area between AVC and ATC is AFC

  5. MC $ ATC AVC Q Total Fixed Cost Q0(ATC-AVC) = Q0 AFC = Q0(TFC/ Q0) = TFC ATC Total Fixed Cost AFC AVC Q0

  6. MC $ ATC AVC Q Total Variable Cost Q0AVC = Q0[TVC(Q0)/ Q0] = TVC(Q0) AVC Total Variable Cost Q0

  7. MC $ ATC AVC Q Total Cost Q0ATC = Q0[C(Q0)/ Q0] = C(Q0) ATC Total Cost Q0

  8. Cubic Cost Function • C(Q) = f + a Q + b Q2 + cQ3 • Marginal Cost? • Memorize: MC(Q) = a + 2bQ + 3cQ2 • Calculus: dC/dQ = a + 2bQ + 3cQ2

  9. An Example • Total Cost: C(Q) = 10 + Q + Q2 • Variable cost function: TVC(Q) = Q + Q2 • Variable cost of producing 2 units: TVC(2) = 2 + (2)2 = 6 • Fixed costs: TFC = 10 • Marginal cost function: MC(Q) = 1 + 2Q • Marginal cost of producing 2 units: MC(2) = 1 + 2(2) = 5

  10. A Firm’s Short Run Costs

  11. A Firm’s Short Run Costs

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