To do

• Print off starter sheet

Starter – key words test
1. Average cost (1) -
_____________________________________________
___________________________________________
2. Average fixed cost (1) -
_____________________________________________
___________________________________________ 3.
Average variable cost (1) -
_____________________________________________
___________________________________________ 4.
Economic cost (1) -
_____________________________________________
___________________________________________ 5.
Fixed or indirect or overhead costs (1) -
_____________________________________________
___________________________________________
6.Imputed cost (1) -
_____________________________________________
___________________________________________
7. Marginal cost (1) -
____________________________________________
____________________________________________
8. Semi-variable cost (1) -
____________________________________________
____________________________________________
9. Total cost (1) -
____________________________________________
____________________________________________
10. Total fixed cost (1) -
____________________________________________
____________________________________________
11. Total variable cost (1) -
____________________________________________
____________________________________________
12. Variable or direct or prime costs (1) -
____________________________________________
____________________________________________
Starter – key words test answers
1. Average cost - the average cost of
production per unit, calculated by dividing
the total cost by the quantity produced. It is
equal to average variable cost + average
fixed cost.
2. Average fixed cost - total fixed cost
divided by the number of units produced.
3. Average variable cost - total variable cost
divided by the number of units produced.
4. Economic cost - the opportunity cost of
an input to the production process.
5. Fixed or indirect or overhead costs -
costs which do not vary as the level of
production increases or decreases.
6.Imputed cost - an economic cost which a
fi rm does not pay for with money to
another firm but is the opportunity cost of
factors of production which the firm itself
owns.
7. Marginal cost - the cost of producing an extra
unit of output.
8. Semi-variable cost - a cost which contains within
it a fixed cost element and a variable cost element.
9. Total cost - the cost of producing any given level
of output. It is equal to total variable cost + total
fixed cost.
10. Total fixed cost - the value of the cost of
production which
does not vary however many units are produced.
11. Total variable cost - the overall cost of those
factors of production that varies directly with the
amount produced.
12. Variable or direct or prime costs - costs which
vary directly in proportion to the level of output of
a firm.
 Lesson title: Costs lesson 3

Lesson objective: What do cost curves look like?

Lesson outcomes:

To be able to explain the shape of the AC and MC curves using the law
of diminishing marginal returns
To be able to analyse diagrammatically cost curves
Cost curves – recap Task 1:
Label each curve
Task 2:
Explain the shape of each
curve, including the vertical
distance between the two
curves
The law of diminishing returns - recap
Explain why a firm may experience diminishing returns in the short run
Average costs and marginal cost curves task
On your diagram, label your x axis quantity and label your y axis costs, and draw the following
curves:

AFC – illustrate what shape this curve would look like

AC (ATC) – illustrate what shape this curve would look like

AVC – illustrate what shape this curve would look like

MC – illustrate what shape this curve would look like

Average costs and marginal cost curves task
AC Important points to note:
If the average cost curve is falling, then
the cost of an extra unit of output (MC)
must also be less that AC.
If the average cost is rising then the
marginal cost of one additional unit
must be even higher than AC.
• the average cost curve is above the
marginal cost curve when average cost is
falling
• the average cost curve is below the
marginal cost curve when average cost is
rising;
• average cost and marginal cost are equal
for all levels of output when average cost
is constant; if the average cost curve is
U-shaped, this means that marginal cost
will be equal to and will cut the average
cost curve at its lowest point.
• The same chain of reasoning applies to
the relationship between the average
variable cost curve and the marginal cost
curve.
Stretch:
Where on the diagram does the
law of diminishing returns kick
in?

The lowest point on the MC and

AVC curves show where the law
of diminishing returns kick in
Changes in costs
A change in fixed costs leads to AC shifting

A change in variable costs leads to a change in AC and MC shifting

Practicing cost curves