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1、Chapter Twenty-OneCost CurvesTypes of Cost CurvesuA total cost curve is the graph of a firms total cost function.uA variable cost curve is the graph of a firms variable cost function.uAn average total cost curve is the graph of a firms average total cost function.Types of Cost CurvesuAn average vari
2、able cost curve is the graph of a firms average variable cost function.uAn average fixed cost curve is the graph of a firms average fixed cost function.uA marginal cost curve is the graph of a firms marginal cost function.Types of Cost CurvesuHow are these cost curves related to each other?uHow are
3、a firms long-run and short-run cost curves related?Fixed,Variable&Total Cost FunctionsuF is the total cost to a firm of its short-run fixed inputs.F,the firms fixed cost,does not vary with the firms output level.ucv(y)is the total cost to a firm of its variable inputs when producing y output units.c
4、v(y)is the firms variable cost function.ucv(y)depends upon the levels of the fixed inputs.Fixed,Variable&Total Cost Functionsuc(y)is the total cost of all inputs,fixed and variable,when producing y output units.c(y)is the firms total cost function;y$Fy$cv(y)y$Fcv(y)y$Fcv(y)c(y)FAv.Fixed,Av.Variable&
5、Av.Total Cost CurvesuThe firms total cost function isFor y 0,the firms average total cost function isAv.Fixed,Av.Variable&Av.Total Cost CurvesuWhat does an average fixed cost curve look like?uAFC(y)is a rectangular hyperbola so its graph looks like.$/output unitAFC(y)y0AFC(y)0 as y Av.Fixed,Av.Varia
6、ble&Av.Total Cost CurvesuIn a short-run with a fixed amount of at least one input,the Law of Diminishing(Marginal)Returns must apply,causing the firms average variable cost of production to increase eventually.$/output unitAVC(y)y0$/output unitAFC(y)AVC(y)y0Av.Fixed,Av.Variable&Av.Total Cost Curvesu
7、And ATC(y)=AFC(y)+AVC(y)$/output unitAFC(y)AVC(y)ATC(y)y0ATC(y)=AFC(y)+AVC(y)$/output unitAFC(y)AVC(y)ATC(y)y0AFC(y)=ATC(y)-AVC(y)AFC$/output unitAFC(y)AVC(y)ATC(y)y0Since AFC(y)0 as y ,ATC(y)AVC(y)as y .AFC$/output unitAFC(y)AVC(y)ATC(y)y0Since AFC(y)0 as y ,ATC(y)AVC(y)as y .And since short-run AV
8、C(y)musteventually increase,ATC(y)must eventually increase in a short-run.Marginal Cost FunctionuMarginal cost is the rate-of-change of variable production cost as the output level changes.That is,Marginal Cost FunctionuThe firms total cost function isand the fixed cost F does not change with the ou
9、tput level y,souMC is the slope of both the variable cost and the total cost functions.Marginal and Variable Cost FunctionsuSince MC(y)is the derivative of cv(y),cv(y)must be the integral of MC(y).That is,Marginal and Variable Cost FunctionsMC(y)y0Area is the variablecost of making y units$/output u
10、nitMarginal&Average Cost FunctionsuHow is marginal cost related to average variable cost?Marginal&Average Cost FunctionsSinceMarginal&Average Cost FunctionsSinceTherefore,asMarginal&Average Cost FunctionsSinceTherefore,asasMarginal&Average Cost Functionsas$/output unityAVC(y)MC(y)$/output unityAVC(y
11、)MC(y)$/output unityAVC(y)MC(y)$/output unityAVC(y)MC(y)$/output unityAVC(y)MC(y)The short-run MC curve intersectsthe short-run AVC curve frombelow at the AVC curves minimum.Marginal&Average Cost FunctionsSimilarly,sinceMarginal&Average Cost FunctionsSimilarly,sinceTherefore,asMarginal&Average Cost
12、FunctionsSimilarly,sinceTherefore,asas$/output unityMC(y)ATC(y)asMarginal&Average Cost FunctionsuThe short-run MC curve intersects the short-run AVC curve from below at the AVC curves minimum.uAnd,similarly,the short-run MC curve intersects the short-run ATC curve from below at the ATC curves minimu
13、m.$/output unityAVC(y)MC(y)ATC(y)Short-Run&Long-Run Total Cost CurvesuA firm has a different short-run total cost curve for each possible short-run circumstance.uSuppose the firm can be in one of just three short-runs;x2=x2 or x2=x2 x2 x2 x2.or x2=x2.y0F =w2x2 F cs(y;x2)$yF 0F =w2x2 F F =w2x2 cs(y;x
14、2)cs(y;x2)$yF 0F =w2x2 F =w2x2 A larger amount of the fixedinput increases the firmsfixed cost.cs(y;x2)cs(y;x2)$F yF 0F =w2x2 F =w2x2 A larger amount of the fixedinput increases the firmsfixed cost.Why does a larger amount of the fixed input reduce the slope of the firms total cost curve?cs(y;x2)cs(
15、y;x2)$F MP1 is the marginal physical productivityof the variable input 1,so one extra unit ofinput 1 gives MP1 extra output units.Therefore,the extra amount of input 1needed for 1 extra output unit isShort-Run&Long-Run Total Cost CurvesMP1 is the marginal physical productivityof the variable input 1
16、,so one extra unit ofinput 1 gives MP1 extra output units.Therefore,the extra amount of input 1needed for 1 extra output unit isShort-Run&Long-Run Total Cost Curves units of input 1.MP1 is the marginal physical productivityof the variable input 1,so one extra unit ofinput 1 gives MP1 extra output un
17、its.Therefore,the extra amount of input 1needed for 1 extra output unit isShort-Run&Long-Run Total Cost Curves units of input 1.Each unit of input 1 costs w1,so the firmsextra cost from producing one extra unitof output isMP1 is the marginal physical productivityof the variable input 1,so one extra
18、unit ofinput 1 gives MP1 extra output units.Therefore,the extra amount of input 1needed for 1 extra output unit isShort-Run&Long-Run Total Cost Curves units of input 1.Each unit of input 1 costs w1,so the firmsextra cost from producing one extra unitof output isShort-Run&Long-Run Total Cost Curvesis
19、 the slope of the firms total cost curve.Short-Run&Long-Run Total Cost Curvesis the slope of the firms total cost curve.If input 2 is a complement to input 1 thenMP1 is higher for higher x2.Hence,MC is lower for higher x2.That is,a short-run total cost curve startshigher and has a lower slope if x2
20、is larger.yF 0F =w2x2 F =w2x2 F F =w2x2 cs(y;x2)cs(y;x2)cs(y;x2)$F Short-Run&Long-Run Total Cost CurvesuThe firm has three short-run total cost curves.uIn the long-run the firm is free to choose amongst these three since it is free to select x2 equal to any of x2,x2,or x2.uHow does the firm make thi
21、s choice?yF 0F y y For 0 y y,choose x2=?cs(y;x2)cs(y;x2)cs(y;x2)$F yF 0F y y For 0 y y,choose x2=x2.cs(y;x2)cs(y;x2)cs(y;x2)$F yF 0F y y For 0 y y,choose x2=x2.For y y y,choose x2=?cs(y;x2)cs(y;x2)cs(y;x2)$F yF 0F y y For 0 y y,choose x2=x2.For y y y,choose x2=x2.cs(y;x2)cs(y;x2)cs(y;x2)$F yF 0F y y
22、 For 0 y y,choose x2=x2.For y y y,choose x2=x2.For y y,choose x2=?cs(y;x2)cs(y;x2)cs(y;x2)$F yF 0F cs(y;x2)y y For 0 y y,choose x2=x2.For y y y,choose x2=x2.For y y,choose x2=x2.cs(y;x2)cs(y;x2)$F yF 0cs(y;x2)cs(y;x2)F cs(y;x2)y y For 0 y y,choose x2=x2.For y y y,choose x2=x2.For y y,choose x2=x2.c(
23、y),thefirms long-run totalcost curve.$F Short-Run&Long-Run Total Cost CurvesuThe firms long-run total cost curve consists of the lowest parts of the short-run total cost curves.The long-run total cost curve is the lower envelope of the short-run total cost curves.Short-Run&Long-Run Total Cost Curves
24、uIf input 2 is available in continuous amounts then there is an infinity of short-run total cost curves but the long-run total cost curve is still the lower envelope of all of the short-run total cost curves.$yF 0F cs(y;x2)cs(y;x2)cs(y;x2)c(y)F Short-Run&Long-Run Average Total Cost CurvesuFor any ou
25、tput level y,the long-run total cost curve always gives the lowest possible total production cost.uTherefore,the long-run av.total cost curve must always give the lowest possible av.total production cost.uThe long-run av.total cost curve must be the lower envelope of all of the firms short-run av.to
26、tal cost curves.Short-Run&Long-Run Average Total Cost CurvesuE.g.suppose again that the firm can be in one of just three short-runs;x2=x2 or x2=x2 (x2 x2 0,the long-run marginal cost of production is the marginal cost of production for the short-run chosen by the firm.y$/output unitACs(y;x2)ACs(y;x2
27、)ACs(y;x2)MCs(y;x2)MCs(y;x2)MCs(y;x2)MC(y),the long-run marginalcost curve.Short-Run&Long-Run Marginal Cost CurvesuFor any output level y 0,the long-run marginal cost is the marginal cost for the short-run chosen by the firm.uThis is always true,no matter how many and which short-run circumstances e
28、xist for the firm.Short-Run&Long-Run Marginal Cost CurvesuFor any output level y 0,the long-run marginal cost is the marginal cost for the short-run chosen by the firm.uSo for the continuous case,where x2 can be fixed at any value of zero or more,the relationship between the long-run marginal cost a
29、nd all of the short-run marginal costs is.Short-Run&Long-Run Marginal Cost CurvesAC(y)$/output unitySRACsShort-Run&Long-Run Marginal Cost CurvesAC(y)$/output unitySRMCsShort-Run&Long-Run Marginal Cost CurvesAC(y)MC(y)$/output unitySRMCsuFor each y 0,the long-run MC equals theMC for the short-run chosen by the firm.