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Costs in a Graph

Costs in a Graph. The curves we consider here are the ones used the most in our economic analysis. Graphs.

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Costs in a Graph

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  1. Costs in a Graph The curves we consider here are the ones used the most in our economic analysis.

  2. Graphs We will use a graph here because lots of information can be packed into one graph. The graph on the next screen is a general graph and is consistent in a general sense with the example we saw in the previous section of notes. In the graph, heights of curves mean one thing and areas of rectangles mean something else. Let’s go there next.

  3. Cost concepts in a graph unit costs ATC1 MC $ ATC b AVC AVC1 a MC1 Q Q1

  4. Interpretation • I have picked Q1 arbitrarily and have drawn a line from this Q up to the highest cost curve. • MC1 is the MC of the this unit. • AVC1 is the AVC of all the units. • ATC1 is the ATC of all the units.

  5. Interpretation continued • Since TC = TFC + TVC, ATC = AFC + AVC or AFC = ATC - AVC. • So in the diagram, AFC1 = ATC1 - AVC1. • Area a = AVC1 times Q1 = TVC1. • Area b = (ATC1 - AVC1) times Q1 = TFC1.

  6. Interpretation continued • Area a + b =TVC1 + TFC1 = TC1. • The concept of diminishing returns is the primary force driving costs in the short run. The rest of the ideas are definitions. The u - shape of the curves are due to the diminishing returns concept.

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