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Cost Curves summary
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Summary of 4 pages for the course ECO204 at U of T (Cost Curves summary)
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ECO204Y-2022/23Cost Curves Summary
(There are a lot of graphs in this chapter -- you should understand and be able to draw
them. Set up a two pane page, with the short run on one side and the long run on the
other, and draw the per unit cost curves (e.g., SAC, SAVC, SAFC, SMC) on a single
graph being careful to note any relationships (e.g., intersections) among them.)
In this chapter we explore various graphical representations of the information
summarized by the firm’s cost curve. Going forward we suppress the factor price
arguments (w1,w 2 ) in the cost function assuming they are held constant:
C(w1,w 2 , y) = C(y)
€ Short Run
The
€ In the short run, the firm faces both costs that do not vary with output, called fixed costs,
and costs that do, called variable costs:
𝐶! (𝑦) = 𝐶" (𝑦) + 𝐹𝐶
(Note sometimes times 𝐶! (𝑦) is called the total cost curve STC(y). Note that in the SR
we not only suppress the factor price arguments (w1,w 2 ) , but also the level of the fixed
input 𝑥̅# : 𝐶! (𝑦) = 𝐶! (𝑤$ , 𝑤# , 𝑦, 𝑥̅ # ). Here 𝐹𝐶 = 𝑤# 𝑥̅# .)
Correspondingly, we can define different types of average costs:
€
%! (') %" (') )%
𝑆𝐴𝐶(𝑦) = '
= '
+ '
= 𝑆𝐴𝑉𝐶(𝑦) + 𝑆𝐴𝐹𝐶(𝑦)
Typically 𝑆𝐴𝐶(𝑦) initially falls, reaches a minimum and then rises. This is in part due to
the effects of averaging the FC over more and more output.
The definition of marginal cost, MC, is:
𝑆𝑀𝐶(𝑦) = 𝜕𝐶! (𝑦)/𝜕𝑦 = 𝜕𝐶" (𝑦)/𝜕𝑦
This last step is due to the fact that in the SR only variable costs change with output.
Note also that SMC(1) = SAVC(1) and 𝑆𝐴𝑉𝐶(0) = 0.
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