
Explanation Of Shape Of Short Run Average Cost And Marginal Cost Curves
Economics notes
Explanation Of Shape Of Short Run Average Cost And Marginal Cost Curves
total cost (TC)
➡️ Total cost (TC) is the sum of total fixed costs (TFC) and total variable costs (TVC). It is the total amount of money spent by a firm to produce a given level of output.
➡️ Average fixed cost (AFC) is the total fixed cost (TFC) divided by the quantity of output produced. It is the cost per unit of output when the quantity of output is increased.
➡️ Average variable cost (AVC) is the total variable cost (TVC) divided by the quantity of output produced. It is the cost per unit of output when the quantity of output is increased, and it is also the marginal cost (MC) when the quantity of output is at its minimum.
What is the relationship between the shape of the short run average cost curve and the marginal cost curve?
The short run average cost curve is U-shaped, while the marginal cost curve is upward sloping. This is because as output increases, the average cost initially decreases due to economies of scale, but eventually increases due to diminishing returns. The marginal cost, on the other hand, increases as output increases due to the law of diminishing returns.
How does the shape of the short run average cost curve affect a firm's pricing decisions?
The shape of the short run average cost curve is important for a firm's pricing decisions because it determines the level of output at which the firm can minimize its average cost. If the average cost is decreasing, the firm should increase its output to take advantage of economies of scale and lower its prices to remain competitive. However, if the average cost is increasing, the firm should decrease its output and raise its prices to maintain profitability.
What factors can cause the short run average cost curve to shift?
The short run average cost curve can shift due to changes in input prices, technology, and the level of competition in the market. An increase in input prices will shift the curve upward, while a decrease in input prices will shift the curve downward. Technological improvements can shift the curve downward by increasing productivity and reducing costs. Increased competition can also shift the curve downward as firms strive to lower their costs to remain competitive.