Total Cost Curve

10 Key excerpts on "Total Cost Curve"

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  eBook - PDF

  Microeconomics

  Theory and Applications

  • Edgar K. Browning, Mark A. Zupan(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  Note that the shape of the TP curve reflects diminishing marginal returns beyond point A (where the slope of the curve reaches a maximum). The total product curve shows the amount of labor used to produce each level of output. If labor is the only variable input, the cost to the firm of hiring labor is the total variable cost of production. Total variable cost can also be measured on the horizontal axis by multiplying each quantity of labor by its unit cost, here assumed to be $10 per hour. For example, from the TP curve we know that producing eight units of output requires 18 hours of labor, and at $10 per hour the total variable cost associated with eight units of output is $180. Thus, when inputs are measured in terms of their cost, the same curve relates input to output and cost to output. The shape of the TVC curve is determined by the shape of the TP curve, which in turn reflects diminishing marginal returns. This relationship explains why understanding the law of diminishing marginal returns is important; it ultimately determines how total variable cost is related to output. In addition, the law also determines the behavior of marginal cost and average variable cost since they are derived from the TVC relationship. We will discuss these relationships in more detail in Section 8.3. By convention, we draw the total variable cost curve with TVC on the vertical axis and output on the horizontal axis, the reverse of the situation in Figure 8.1, which is why the TVC curve may not look right at first glance. To see its more conventional appearance, refer to Figure 8.2a, which represents Figure 8.1 after its axes have been interchanged. Short-Run Cost Curves Now let’s take a more careful look at the relationship between cost and output by using the firm’s cost curves. Figure 8.2a shows the firm’s Total Cost Curves, and Figure 8.2b shows the per-unit cost curves.

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  Principles of Agricultural Economics

  • Andrew Barkley, Paul W. Barkley(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The units for TR are in dollars, since output (Y) times price (USD/Y) is in terms of dollars. The units of output cancel each other.

  The level of Total Costs (TC) measures the payments that a firm must make to purchase the factors of production. The production of a good or service transforms inputs into outputs. These inputs are not free, but require payments, because they are scarce. The sum of all of the payments for inputs describes the total costs that a firm must pay to produce a given quantity of a good.

  Quick Quiz 3.1

  Define scarcity. What implications does scarcity have for the production process?

  Commodity promotion associations often present an award to the corn or wheat producer whose fields produce the highest yield per acre in the county or state. The award winner typically wins a cash prize, publicity in the local newspaper, recognition at the county fair, and Internet coverage. These contests and awards are interesting and even fun, but economists and agricultural economists who deal with commodity production are more interested in finding ways to help producers understand that the maximum level of profits differs from the highest level of production.

  A yield contest encourages farmers to produce the maximum level of output. This requires large amounts of scarce inputs, and can be a costly activity. The contest winner will have total costs (the costs of the scarce inputs) that may be much higher than the market value of the crop. A simple graph of total revenue and total costs helps illustrate this.

  In Figure 3.1 , the vertical distance between the TR curve and the TC curve indicates the profits (π) accruing at each level of output. Total Revenue, defined as price times output, is an increasing function of output (measured on the horizontal axis of Figure 3.1

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  Economics

  Theory and Practice

  • Patrick J. Welch, Gerry F. Welch(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  Total fixed cost is the same regardless of how much is produced; total variable cost increases as output increases. Average total cost is the cost per unit of output at a given level of production and is found by dividing total cost by the number of units of output produced. Marginal cost is the change in total cost resulting from the production of an additional unit of output. 6. In the short run, total cost increases slowly at low levels of output and rapidly at high levels of output. Average total cost decreases and then increases, as does marginal cost. These patterns are the result of the way in which variable factor usage increases as production increases. At low levels of output, small amounts of variable factors are needed with the fixed factors, and at high levels of output, large amounts of variable factors are needed to compensate for the limits imposed by the fixed factors. 7. Underlying the patterns of short‐run costs is the Law of Diminishing Returns, which says that as a variable factor of production is added to fixed factors, beyond some point the additional product from each additional unit of the variable factor will decrease. 8. Long‐run average total cost illustrates the pattern of costs in the long run. The shape of the long‐run average Total Cost Curve is the result of economies of scale that occur in the early stages of long‐run production and cause the cost per unit of output to drop, constant returns to scale where average total cost stays the same, and diseconomies of scale that occur in the late stages of long‐run produc- tion and cause the cost per unit of output to increase. Summary Review Questions 327 1. What is a producing sector? Give some examples. How does this differ from the industry classification? 2. A friend believes that, as far as the costs of operating a business are concerned, short‐run costs are the costs that are incurred within the current year and long‐ run costs are those spread over more than a year.

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  Intermediate Microeconomics and Its Application

  • Walter Nicholson, Christopher Snyder(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  CHAPTER 8 ● Costs 237 on the horizontal axis (here, quantity). 4 In panel a of Figure 8.3, the Total Cost Curve is a straight line—it has the same slope throughout. In this case, marginal cost (MC) is con-stant. No matter how much is produced, it will always cost the same to produce one more unit. The horizontal MC curve in panel a of Figure 8.4 reflects this fact. In the case of decreasing returns to scale (panel b in Figure 8.3), marginal costs are increasing. The Total Cost Curve becomes steeper as output expands, so, at the margin, the cost of one more unit is becoming greater. The MC curve in panel b in Figure 8.4 is posi-tively sloped, reflecting these increasing marginal costs. For the case of increasing returns to scale (panel c in Figure 8.3), this situation is re-versed. Because the Total Cost Curve becomes flatter as output expands, marginal costs fall. The marginal cost curve in panel c in Figure 8.4 has a negative slope. Finally, the case of first concave, then convex, total costs (panel d in Figure 8.3) yields a U-shaped marginal cost curve in panel d in Figure 8.4. Initially, marginal costs fall because the coordination and control mechanism of the firm is being utilized more efficiently. De-creasing returns eventually appear, however, and the marginal cost curve turns upward. The MC curve in panel d in Figure 8.4 reflects the general idea that there is some optimal level of operation for the firm—if production is pushed too far, very high marginal costs will be the result. We can make this idea of optimal scale more precise by looking at aver-age costs. 8-3c Average Cost Curves Developing average cost (AC) curves for each of the cases in Figure 8.4 is also relatively simple. The average and marginal cost concepts are identical for the very first unit pro-duced. If the firm produced only one unit, both average and marginal cost would be the cost of that one unit.

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  Agricultural Production Economics in 2 Vols.

  • Kumar, K Nirmal Ravi(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  When LRMC curve is above the LRATC curve, the LRATC curve is rising. So, the relationship between LRMC curve and LRATC curve in long run production programme is similar to the relationship between SRMC curve and SRATC curve in short run production programme. III. Cost Function Cost function refers to the functional relationship between cost and output. Various resources and resource services determine the cost of output in the production of programme. So, we can write the cost function as, C = f (fixed factors, variable factors, technology, output, etc) But, all the factors viz ., fixed factors, variable factors and technology influence the output. Hence, finally we can write, C = f(output) or C = f(Y). A Total Cost (TC) curve, C 1 shown in the Figure 5.42 is a ‘S’ shaped curve. At the beginning of the production programme or initial quantities of output i.e ., OY 1 , there will be economics of scale, where the firm experiences increasing returns or decreasing costs. Hence, the TC curve C 1 rises slowly between A and B points. If the output is increased from OY 1 to OY 2 , due to employment of more of variable resources, due to constant returns or constant costs, the cost curve rises at a constant rate between B and C points on the TC curve. If the output is further increased beyond OY 2 by increasing the level of variable resources, due to operation of diminishing returns/ increasing costs, the cost curve rises rapidly beyond point C on the TC curve thus, giving ‘S’ shape to TC curve. This ebook is exclusively for this university only. Cannot be resold/distributed. Figure 5.42 : Cost Function Showing the Relation between Cost and Output. Cost function can also be explained from the concepts of both TFC and TVC in the short run production programme. We know, TC= TFC+TVC. But TFC remains constant at different levels of output.

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  Supply in a Market Economy

  • Richard Jones(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  Figure 3.1 gives rise to average and marginal curves of the typical U-shape. A straight-line Total Cost Curve would produce equal average and marginal costs, which would be constant for all rates of output. The long-run average and marginal cost curves would be the same horizontal straight line.

  The majority of economists do not accept that the evidence of L-shaped curves requires the typical U-shaped curve to be rejected. This will be clear from an inspection of any textbook. There are two main reasons for this. First, the evidence is by no means overwhelming – much of it refers to public utilities. Second, there is the impact of the methodological issue raised above; that is, many economists would argue that the evidence does not refute the theory of the U-shaped curve because there is not a close relationship between: (a) the theoretical concept of a plant relationship between costs and the rate of output of a homogeneous product in a static world, and (b) the empirical relationship between costs and output in multiproduct enterprises operating in a dynamic environment when all other factors influencing costs may not have been successfully eliminated. Walters summed up this point of view in the following words:

  '. . . the U-shaped hypothesis does not inspire great confidence. But this is not because it has been refuted by direct empirical evidence. On the contrary this lack of faith is occasioned by the very few opportunities for collecting evidence to refute the data directly ... at least there is no large body of data which convincingly contradicts the hypothesis of a U-shaped long-run cost curve and the fruitful results which depend on it.'11

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  Studies in Economics and Political Science

  13 Volume Set

  • Various(Author)
  • 2022(Publication Date)
  • Taylor & Francis

    (Publisher)

  The average cost associated with any level of output is given by the slope of the line from the origin to the corres- 46 SUPPLY IN A MARKET ECONOMY ponding point on the Total Cost Curve. Minimum average cost obtains at the output at which this ray from the origin is tangential to the curve of total cost. The final column of Table 3.1 contains marginal cost data. Margi- nal cost (MQ is defined as the addition to total cost resulting from the production of one more unit of output. The marginal fixed cost is, of course, always zero. As was explained in Chapter 2, marginal relationships can be read from curves of total values. Marginal cost is given by the slope of the Total Cost Curve or, in the case of a non- linear curve, by the slope of a tangent to the curve at any given point. It will be clear that, as the minimum average cost is given by the tangent of the line from the origin to the Total Cost Curve, and as this tangent also gives the marginal cost at this point, marginal cost equals average cost when average cost is at a minimum. The relationships between the curves are shown in Figure 3.2, which is constructed from the data in Table 3.1. The points to be noted are: 1 AFC declines continuously. 2 AVC at first declines to a minimum and then rises. When AVC is a minimum it equals MC. 3 ATC declines to a minimum then rises. When ATC is a minimum it equals MC. 4 MC first declines, reaches a minimum and then rises. MC equals both AVC and ATC when these curves are at their lowest points. 5 MC is below AVC and ATC when these curves are declining and above them when they are rising. The ATC thus assumes its characteristic U-shape of economic theory. The curves illustrated in Figure 3.2 are typical short-run curves. The U-shape is important in economic theory and is charac- teristic of both the short and long run. The importance of the assumption of a U-shaped curve is made clear when the theory of the perfectly competitive market is considered in Chapter 4. The AVC and AFC curves are most frequently omitted in this analysis, but they are not without importance. In particular, the level of AVC is important in determining whether or not a firm will stay in produc- tion. Fixed costs have to be met anyway, but variable costs can be

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  Microeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Each of the short-run average cost curves is tangent to the long-run average cost curve, or planning curve . If we could display enough short-run cost curves, we would have a different plant size for each rate of output. These points of tangency represent the least-cost way of producing each particular rate of output, given resource prices and the technology . For example, the short-run average Total Cost Curve ATC 1 is tangent to the long-run average cost curve at point a, where $11 is the lowest aver-age cost of producing output q . Note, however, that other output rates along ATC 1 have a lower average cost. For example, the average cost of producing q 9 is only $10, as identified at point b . Point b depicts the lowest average cost along ATC 1 . So, while the point of tangency reflects the least-cost way of producing a particular rate of output, that tangency point does not reflect the minimum average cost for this particular plant size. If the firm decides to produce q 9 , which size plant should it choose to minimize the average cost of production? Output rate q 9 could be produced at point b, which long-run average cost curve A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 156 Part 2 Introduction to the Market System represents the minimum average cost along ATC 1 .

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  Survey of Economics

  • Irvin Tucker(Author)
  • 2018(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  When marginal cost is less than average cost, average cost falls. When marginal cost is greater than average cost, average cost rises. Following this rule, the marginal cost curve intersects the average variable cost curve and the average Total Cost Curve at their minimum points. • The long-run average cost curve (LRAC) is a curve drawn tangent to all possible short-run average Total Cost Curves. When the LRAC curve decreases as output increases, a firm experiences economies of scale . If the LRAC curve remains unchanged as output increases, a firm experiences constant returns to scale . If the LRAC curve increases as output increases, a firm experiences diseconomies of scale . Long-Run Average Cost Curve Cost per unit (dolla rs) Quantity of output LRAC Economies of scale Constant returns to scale Diseconomies of scale Q 2 Q 1 0 Summary of Conclusion Statements • Since business decision making is based on economic profit, rather than accounting profit, the word profit in this text always means economic profit. • A firm operates in the short run when there is insufficient time to alter some fixed input. The firm plans in the long run when all inputs are variable. • The plant size selected by a firm in the long run depends on the expected level of production. Study Questions and Problems Please see Appendix A for answers to odd-numbered study questions. Your instructor has access to the even-numbered answers. 1. Indicate whether each of the following is an explicit cost or an implicit cost. a. A manager’s salary b. Payments to Dell for computers c. A salary forgone by the owner of a firm by operat-ing his or her own company d. Interest forgone on a loan an owner makes to his or her own company e. Medical insurance payments a company makes for its employees f. Income forgone while going to college 2. Suppose you own a video game store. List some of the fixed inputs and variable inputs you would use in operating the store.

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  The Economics Companion

  • Graham Mallard(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  This means the marginal cost curve of the producer is in fact its supply curve . More precisely, the marginal cost curve is the inverse supply curve , but for clarity the convention is to refer to it simply as the supply curve (which we do from here on). However, you should be aware of the dif-ference between inverse and normal supply curves and when they should each be used. Key term: supply curve The supply curve shows the minimum price the producer requires for each unit at a particular level of output sold. As with demand, the supply curve can be drawn as either the inverse supply curve , which measures price on the vertical axis and quantity supplied on the horizontal axis, thereby representing price as a function of quantity supplied, P=f(Qs); or the normal supply curve , which measures quantity supplied on the vertical axis and price on the horizontal axis, and so represents quantity supplied as a function of price, Qs=f(P). Economists usually use the inverse form for diagrams and the normal form for mathematical calculation (see Section 5.4 and Box 6.2 for discussion of this point). However, there are two caveats to this rule, which are illustrated in Figure 6.6 in which the average cost (AC), average variable cost (AVC) and marginal cost (MC) curves of the producer are presented. The difference between the aver-age cost and average variable cost curves is accounted for by average fixed cost, which, following our analysis above, diminish as output expands: shown in the figure by the average cost and average variable cost curves converging as out-put expands. First, we see that there may be prices, such as P 1 , that are associated with the two points on the marginal cost curve: a downward-sloping point and an upward-sloping point.

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