AP Economics
Mr. Bernstein
Module 55:
Firm Costs
November 2015
AP Economics
Mr. Bernstein
Cost Curves
• In the short run,
there are variable
inputs and at least
one fixed input
• The variable inputs
have cost curves
• Common abbrev.:
T – Total, V – Variable, F – Fixed, A – Average and M - Marginal
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AP Economics
Mr. Bernstein
Cost Curves
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TC = FC + VC
FC are fixed (!) and VC vary with output
C is on vertical axis and Q on horizontal axis
FC is a horizontal line, even at zero production (Q = 0)
VC rises faster as output is increased.
The shape of TC curve is the same as the shape of VC
curve, staying higher by the amount of FC
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AP Economics
Mr. Bernstein
Marginal Cost
• MC is the slope of the TC curve (and the VC curve)
• MC = ΔTC/ΔQ = Δ(VC + FC)/ΔQ = ΔVC/ΔQ
• Why does the MC curve initially decline, then
eventually rise?
• Example: Labor. Specialization causes initial decline.
Diminishing Returns eventually turn curve upward.
• Reff: Looks like a Nike swoosh, while ATC curve is Ushaped (or a Smiley face) and AVC curve is a “Smirk”
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AP Economics
Mr. Bernstein
Average Cost
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Per-unit costs
ATC = TC/Q; AVC = TVC/Q and AFC = TFC/Q
And since TC = TFC + TVC, ATC= AFC + AVC
Why is the AC curve U-shaped?
• Initially average costs decline as fixed costs are spread
over more units
• Eventually the effect of Diminishing Returns on variable
costs overwhelms the “Spreading effect”
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AP Economics
Mr. Bernstein
The Relationship between Marginal and
Average Costs
• The MC curve intersects the U-shaped AC and AVC
curves at their minimum points
• AC will fall as long as MC<AC
• Once MC rises above AC,
AC will begin to rise
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