MSIN0181: Understanding the Information Economy
Topic 2: Curves and Elasticity
Cost Curves
Cost curves describe the relationship between cost and quantity for a producer.
• We start from the assumption that the firm is a profit maximiser (that is intends to
maximise profits).
Costs & Revenue
Assumption: firms are rationale profit maximiser
• Profits and costs are evaluated after all relevant costs, including opportunity cost, are
calculated.
Profit Equation:
Fixed & Variable Costs
• Fixed costs are incurred irrespective of how much output you make
• Variable costs are incurred by unit produced
• TC = FC + VC
• As total fixed cost is a constant, it will be contributing a smaller amount towards total
cost as production goes up - economies of scale
Average Costs
• Total cost / number of units produced = average cost
• TC / Q = AC
• AC = Average Fixed Cost (AFC) + Average Variable Costs (AVC)
• Or TC / Q = FC / Q + VC / Q
• As Q geos up AFC will fall - driver of economies of scale
Shape of an Average Cost Curve
• Y axis - anything denominated in money (price and cost)
• X axis - quantity
, Short versus long run average costs
• In the short run, the firm is assumed capable of altering only one factor of production
(capital, labour, land, entrepreneurial talent).
• However, in the long run, all factors can be altered.
Implications of Long Run
• The Average Cost curve is more elastic (flatter)/ output elastic - as more things are
capable of being changed
• Any minimum of a short run average cost curve must be on the long run curve (as the
LR curve indicates a higher level of efficiency)
o The LR curve connects together the most efficient SR points
• Minimum Efficient Scale - lowest cost position which a firm can operate in the long run
Marginal Cost
Means the cost of only producing the last unit of output
In economics, the marginal cost of production is the change in total production cost that comes from
making or producing one additional unit. To calculate marginal cost, divide the change in production
costs by the change in quantity. The purpose of analysing marginal cost is to determine at what point
an organization can achieve economies of scale to optimize production and overall operations. If the
marginal cost of producing one additional unit is lower than the per-unit price, the producer has the
potential to gain a profit.
Topic 2: Curves and Elasticity
Cost Curves
Cost curves describe the relationship between cost and quantity for a producer.
• We start from the assumption that the firm is a profit maximiser (that is intends to
maximise profits).
Costs & Revenue
Assumption: firms are rationale profit maximiser
• Profits and costs are evaluated after all relevant costs, including opportunity cost, are
calculated.
Profit Equation:
Fixed & Variable Costs
• Fixed costs are incurred irrespective of how much output you make
• Variable costs are incurred by unit produced
• TC = FC + VC
• As total fixed cost is a constant, it will be contributing a smaller amount towards total
cost as production goes up - economies of scale
Average Costs
• Total cost / number of units produced = average cost
• TC / Q = AC
• AC = Average Fixed Cost (AFC) + Average Variable Costs (AVC)
• Or TC / Q = FC / Q + VC / Q
• As Q geos up AFC will fall - driver of economies of scale
Shape of an Average Cost Curve
• Y axis - anything denominated in money (price and cost)
• X axis - quantity
, Short versus long run average costs
• In the short run, the firm is assumed capable of altering only one factor of production
(capital, labour, land, entrepreneurial talent).
• However, in the long run, all factors can be altered.
Implications of Long Run
• The Average Cost curve is more elastic (flatter)/ output elastic - as more things are
capable of being changed
• Any minimum of a short run average cost curve must be on the long run curve (as the
LR curve indicates a higher level of efficiency)
o The LR curve connects together the most efficient SR points
• Minimum Efficient Scale - lowest cost position which a firm can operate in the long run
Marginal Cost
Means the cost of only producing the last unit of output
In economics, the marginal cost of production is the change in total production cost that comes from
making or producing one additional unit. To calculate marginal cost, divide the change in production
costs by the change in quantity. The purpose of analysing marginal cost is to determine at what point
an organization can achieve economies of scale to optimize production and overall operations. If the
marginal cost of producing one additional unit is lower than the per-unit price, the producer has the
potential to gain a profit.
