Costs
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Costs
Short-run costs
Total cost
Total costs for firm X
Output TFC (Q) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
40
20
0 0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC (Q) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
0 10 16 21 28 40 60 91
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
0 10 16 21 28 40 60 91
TVC
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X 100
TVC 80
Diminishing marginal returns set in here
60
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
0 10 16 21 28 40 60 91
TVC
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
Total costs for firm X
TC (£)
0 10 16 21 28 40 60 91
12 22 28 33 40 52 72 103
TVC
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
Total costs for firm X
TC (£)
0 10 16 21 28 40 60 91
TC
12 22 28 33 40 52 72 103
TVC
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X TC
100
TVC 80
Diminishing marginal returns set in here
60
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Short-run costs
Marginal cost = TC / Q
Deriving marginal costs
Costs (£) 120
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
100
80
60
40
MC 10 6 5 7 12 20 31
20
0 0
1
2
3
4
5
6
7
Q
Deriving marginal costs
Costs (£) 120
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
100
80
60
40
MC TC
10 6 5 7 12 20 31
20
0 0
1
2
3
4
5
6
7
Q
Deriving marginal costs
Costs (£) 120
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
100
80
60
40
MC TC
10 6 5 7 12 20 31
∆TC = 12 ∆Q = 1
20
0 0
1
2
3
4
5
6
7
Q
Deriving marginal costs
Costs (£) 120
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
100
80
60
40
MC TC
10 6 5 7 12 20 31 Diminishing returns set in here
20
MC
0 0
1
2
3
4
5
6
7
Q
Deriving marginal costs
Costs (£) 35
MC
30 25
Diminishing marginal returns set in here
20 15 10 5 0 0
1
2
3
4
5
6
7
Q
Short-run costs
Average cost =TC / Q
Costs (£) 35 30 25 20 15 10 5 0 0
1
2
3
4
5
6
7
Q
Costs (£)
Q TVC AVC 0 0 1 10 10 2 16 8 3 21 7 4 28 7 5 40 8 6 60 10 7 91 13
35 30 25 20 15 10 5
AFC
0 0
1
2
3
4
5
6
7
Q
Costs (£)
Q TVC AVC 0 0 1 10 10 2 16 8 3 21 7 4 28 7 5 40 8 6 60 10 3 13 7 91
35 30 25 20 15
AVC
10 5
AFC
0 0
1
2
3
4
5
6
7
Q
Costs (£)
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
35 30 25 20
AC 22 14 11 10 10.4 12 14.7
15
AVC
10 5
AFC
0 0
1
2
3
4
5
6
7
Q
Costs (£)
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
35 30 25 20
AC 22 14 11 10 10.4 12 14.7
15
AC
10
AVC
5
AFC
0 0
1
2
3
4
5
6
7
Q
Q TC MC 0 12 10 1 22 6 2 28 5 3 33 7 4 40 12 5 52 20 6 72 31 7 103
Costs (£) 35 30 25 20 15 10 5 0 0
1
2
3
4
5
6
7
Q
Q TC MC 0 12 10 1 22 6 2 28 5 3 33 7 4 40 12 5 52 20 6 72 31 7 103
Costs (£) 35 30 25 20
MC
15 10 5 0 0
1
2
3
4
5
6
7
Q
Q TC MC AC 0 12 10 22 1 22 6 14 2 28 5 11 3 33 7 10 4 40 12 10.4 5 52 20 12 6 72 31 14.7 7 103
Costs (£) 35 30 25 20
MC
15 10 5 0 0
1
2
3
4
5
6
7
Q
Q TC MC AC 0 12 10 22 1 22 6 14 2 28 5 11 3 33 7 10 4 40 12 10.4 5 52 20 12 6 72 31 14.7 7 103
Costs (£) 35 30 25 20
MC
AC
15 10 5 0 0
1
2
3
4
5
6
7
Q
Average and marginal costs MC
AC
Costs (£)
AVC
z y x AFC
Output (Q)
Long-run costs
Long-run costs =TC / Q
Costs
Alternative long-run average cost curves
Economies of Scale
LRAC
O
Output
Alternative long-run average cost curves
Costs
LRAC
O
Diseconomies of Scale
Output
Costs
Alternative long-run average cost curves
O
Constant costs LRAC
Output
A typical long-run average cost curve
Costs
LRAC
O
Output
Costs
A typical long-run average cost curve
O
Economies of scale
Constant costs
Output
Diseconomies of scale
LRAC
Costs
Long-run average and marginal costs
Economies of Scale
LRAC LRMC O
Output
Long-run average and marginal costs
Costs
LRMC
O
Diseconomies of Scale
Output
LRAC
Costs
Long-run average and marginal costs
O
Constant costs LRAC = LRMC
Output
Long-run average and marginal costs
Initial economies of scale, then diseconomies of scale
LRAC
Costs O
LRMC
Output
Long-run costs
Relationship between short-run and long-run AC curves
Deriving long-run average cost curves: factories of fixed size
Costs
SRAC1 SRAC 2
SRAC3
1 factory 2 factories 3 factories4 factories
O
Output
SRAC5 SRAC4
5 factories
Deriving long-run average cost curves: factories of fixed size SRAC1 SRAC 2
SRAC3
SRAC5 SRAC4
Costs
LRAC
O
Output
Costs
Deriving long-run average cost curves: choice of factory size
Examples of short-run average cost curves
O
Output
Deriving long-run average cost curves: choice of factory size
Costs
LRAC
O
Output
Short-run costs
Total cost
Total costs for firm X
Output TFC (Q) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
40
20
0 0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC (Q) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
0 10 16 21 28 40 60 91
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
0 10 16 21 28 40 60 91
TVC
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X 100
TVC 80
Diminishing marginal returns set in here
60
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
0 10 16 21 28 40 60 91
TVC
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
Total costs for firm X
TC (£)
0 10 16 21 28 40 60 91
12 22 28 33 40 52 72 103
TVC
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Output TFC TVC (Q) (£) (£)
100
0 1 2 3 4 5 6 7
80
60
12 12 12 12 12 12 12 12
Total costs for firm X
TC (£)
0 10 16 21 28 40 60 91
TC
12 22 28 33 40 52 72 103
TVC
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Total costs for firm X TC
100
TVC 80
Diminishing marginal returns set in here
60
40
20
TFC 0 0
1
2
3
4
5
6
7
8
Short-run costs
Marginal cost = TC / Q
Deriving marginal costs
Costs (£) 120
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
100
80
60
40
MC 10 6 5 7 12 20 31
20
0 0
1
2
3
4
5
6
7
Q
Deriving marginal costs
Costs (£) 120
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
100
80
60
40
MC TC
10 6 5 7 12 20 31
20
0 0
1
2
3
4
5
6
7
Q
Deriving marginal costs
Costs (£) 120
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
100
80
60
40
MC TC
10 6 5 7 12 20 31
∆TC = 12 ∆Q = 1
20
0 0
1
2
3
4
5
6
7
Q
Deriving marginal costs
Costs (£) 120
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
100
80
60
40
MC TC
10 6 5 7 12 20 31 Diminishing returns set in here
20
MC
0 0
1
2
3
4
5
6
7
Q
Deriving marginal costs
Costs (£) 35
MC
30 25
Diminishing marginal returns set in here
20 15 10 5 0 0
1
2
3
4
5
6
7
Q
Short-run costs
Average cost =TC / Q
Costs (£) 35 30 25 20 15 10 5 0 0
1
2
3
4
5
6
7
Q
Costs (£)
Q TVC AVC 0 0 1 10 10 2 16 8 3 21 7 4 28 7 5 40 8 6 60 10 7 91 13
35 30 25 20 15 10 5
AFC
0 0
1
2
3
4
5
6
7
Q
Costs (£)
Q TVC AVC 0 0 1 10 10 2 16 8 3 21 7 4 28 7 5 40 8 6 60 10 3 13 7 91
35 30 25 20 15
AVC
10 5
AFC
0 0
1
2
3
4
5
6
7
Q
Costs (£)
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
35 30 25 20
AC 22 14 11 10 10.4 12 14.7
15
AVC
10 5
AFC
0 0
1
2
3
4
5
6
7
Q
Costs (£)
Q TC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103
35 30 25 20
AC 22 14 11 10 10.4 12 14.7
15
AC
10
AVC
5
AFC
0 0
1
2
3
4
5
6
7
Q
Q TC MC 0 12 10 1 22 6 2 28 5 3 33 7 4 40 12 5 52 20 6 72 31 7 103
Costs (£) 35 30 25 20 15 10 5 0 0
1
2
3
4
5
6
7
Q
Q TC MC 0 12 10 1 22 6 2 28 5 3 33 7 4 40 12 5 52 20 6 72 31 7 103
Costs (£) 35 30 25 20
MC
15 10 5 0 0
1
2
3
4
5
6
7
Q
Q TC MC AC 0 12 10 22 1 22 6 14 2 28 5 11 3 33 7 10 4 40 12 10.4 5 52 20 12 6 72 31 14.7 7 103
Costs (£) 35 30 25 20
MC
15 10 5 0 0
1
2
3
4
5
6
7
Q
Q TC MC AC 0 12 10 22 1 22 6 14 2 28 5 11 3 33 7 10 4 40 12 10.4 5 52 20 12 6 72 31 14.7 7 103
Costs (£) 35 30 25 20
MC
AC
15 10 5 0 0
1
2
3
4
5
6
7
Q
Average and marginal costs MC
AC
Costs (£)
AVC
z y x AFC
Output (Q)
Long-run costs
Long-run costs =TC / Q
Costs
Alternative long-run average cost curves
Economies of Scale
LRAC
O
Output
Alternative long-run average cost curves
Costs
LRAC
O
Diseconomies of Scale
Output
Costs
Alternative long-run average cost curves
O
Constant costs LRAC
Output
A typical long-run average cost curve
Costs
LRAC
O
Output
Costs
A typical long-run average cost curve
O
Economies of scale
Constant costs
Output
Diseconomies of scale
LRAC
Costs
Long-run average and marginal costs
Economies of Scale
LRAC LRMC O
Output
Long-run average and marginal costs
Costs
LRMC
O
Diseconomies of Scale
Output
LRAC
Costs
Long-run average and marginal costs
O
Constant costs LRAC = LRMC
Output
Long-run average and marginal costs
Initial economies of scale, then diseconomies of scale
LRAC
Costs O
LRMC
Output
Long-run costs
Relationship between short-run and long-run AC curves
Deriving long-run average cost curves: factories of fixed size
Costs
SRAC1 SRAC 2
SRAC3
1 factory 2 factories 3 factories4 factories
O
Output
SRAC5 SRAC4
5 factories
Deriving long-run average cost curves: factories of fixed size SRAC1 SRAC 2
SRAC3
SRAC5 SRAC4
Costs
LRAC
O
Output
Costs
Deriving long-run average cost curves: choice of factory size
Examples of short-run average cost curves
O
Output
Deriving long-run average cost curves: choice of factory size
Costs
LRAC
O
Output
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