Firm Costs

1. Module Micro: Econ: 19 55 Firm Costs • KRUGMAN'S • MICROECONOMICS for AP* Margaret Ray and David Anderson

2. What you will learnin thisModule: • The various types of cost a firm faces, including fixed cost, variable cost, and total cost • How a firm’s costs generate marginal cost curves and average cost curves

3. From the Production Function to Cost Curves The previous module covered the production function and diminishing returns. In the short run, there are variable inputs and at least one fixed input. To hire inputs for production, the firm will incur production costs which we represent with cost curves.

4. Total Costs • Fixed costs (FC) are costs whose total does not vary with changes in output. These are the payments to the fixed inputs in the production function. • Variable costs (VC) are costs that change with the level of output. These are the payments to the variable inputs in the production function. • Total cost (TC) is the sum of total fixed and total variable costs at each level of output. TC = FC + VC

5. Marginal cost • MC is the additional cost of producing one more unit of output. MC = ΔTC/ΔQ = Δ(VC + FC)/ΔQ = ΔVC/ΔQ

6. Average Cost • Average (AC) is the total cost divided by the level of output (it is also called average cost, unit cost, or per unit cost). ATC = TC/Q AVC = TVC/Q AFC = TFC/Q • Since TC = TFC + TVC, ATC= AFC + AVC

7. The relationship between MC and AC • The MC curve intersects the U-shaped ATC and AVC at their respective minimum points.