Analyzing the Cost Curves

Grade 8 Economics

Table on cost calculations

Unit of Fixed Cost Variable cost output 0 1 2 3 4 100 100 100 100 100 0 35 56 74 100 Total cost Marginal Cost _ 35 21 18 26 Average Cost _ 135 78 58 50

100 135 156 174 200

5 6
7 8

100 100
100 100

140 200
285 396

240 300
385 496

40 60
85 111

48 50
55 62

The Shapes of FC, VC & TC curves

TC d VC

FC

om = ab= cd

The Shapes of FC, VC & TC curves

FC curve is horizontal to output axis (x-axis). VC curve starts from zero and increases with the increase in output. TC curve carries same shape as the VC curve because TC is the summation of FC and VC.

AC and MC curves U shaped

AC>MC
AC

AC=MC AC<MC
AC

Why are AC and MC curves U shaped?

Both MC and AC curves reflect the law of variable proportions. When output is increased in the short run, it can only be done by increasing the variable factors. Initially both MC and AC fall as the productivity increases with the increase in the variable factor.

The law of diminishing marginal productivity sets in as more and more of a variable factor is added to fixed factors.
If the output increases after the optimum size, productivity starts to fall, both MC and AC start to rise.

Relationship between Costs and Productivity

When Productivity Cost

When Productivity Cost