1、Chapter Twenty-OneCost CurvesWhat do we do in this chapter?uWe examine how c(y)varies with y.uWhy?We need to prepare ourselves for studying firms supply.uWe have the following types of cost curves:A total cost curve and average total cost curve A variable cost curve and average variable cost curve A
2、n average fixed cost curve Marginal cost curveComparing consumer behavior with producer behavioru Consumer:Maximize Utility subject to linear constraint;u Producer:Minimize linear function subject to production function;u Minimizing a linear function makes things much simpler;u Also,the production f
3、unction is cardinal;utility is ordinal!From last Chapter:Short-Run&Long-Run Total Costsx1x2 y y y x1 x1 x1 x2 x2 x2Short-runoutputexpansionpathLong-run costs are:c yw xw xc yw xw xc yw xw x()()()1 12 21 12 21 12 2Short-run costs are:cyc ycyc ycyc ysss()()()()()()Fixed,Variable&Total Cost Functionsu
4、Let F be the short-run fixed cost F does not vary with the firms output level.u Let cv(y)be the variable cost function.uThen the total cost function isc yFcyv()().y$Fcv(y)c(y)Fc yFcyv()()Av.Fixed,Av.Variable&Av.Total Cost CurvesuFor y 0,the firms average total cost function isAC yFycyyAFC yAVC yv()(
5、)()().$/output unitAFC(y)y0AFC(y)0 as y Av.Fixed,Av.Variable&Av.Total Cost Curvesu How about the average variable cost?u It must be increasing eventuallyu Since at least one input is fixed in the short-run.$/output unitAFC(y)AVC(y)ATC(y)y0Since AFC(y)0 as y ,ATC(y)AVC(y)as y .And since short-run AVC
6、(y)musteventually increase,ATC(y)must eventually increase in a short-run.Marginal Cost FunctionuSince the firms total cost function is:uThe marginal cost is:c yFcyv()()MC ycyyc yyv()()().Marginal and Variable Cost FunctionsuNote:MC ycyyv()()cyMC z dzvy()().0Marginal and Variable Cost FunctionsMC(y)y
7、0cyMC z dzvy()()0 yArea is the variablecost of making y units$/output unitHow is marginal cost related to average variable cost?SinceAVC ycyyv()(),AVC yyyMC ycyyv()()().12Therefore,MC ycyyAVC yv()()().as AVC yy()0$/output unityAVC(y)MC(y)MC yAVC yAVC yy()()()0The short-run MC curve intersectsthe sho
8、rt-run AVC curve frombelow at the AVC curves minimum.MC and ATC are similarly relatedSimilarly,sinceATC yc yy()(),ATC yyyMC yc yy()()().12Therefore,MC yc yyATC y()()().as ATC yy()0$/output unityMC(y)ATC(y)MC yATC y()()as ATC yy()0$/output unityAVC(y)MC(y)ATC(y)Short-Run&Long-Run Total Cost CurvesuSuppose the firm can be in one of just three short-runs;x2=x2 or x2=x2 x2 x2 0,the long-run MC equals theMC for the short-run chosen by the firm.Summary:Key RelationshipsuATC and AVC;uMC and AVC(ATC);uLong-run TC(AC)with short-run TC(AC);uLong-run MC and short-run MCs.
