EC4101 Week 09 Lecture 02 Economics PDF

EC4101 Wk.09 Lec.02 Average Total Cost = TC/Q Average Fixed Cost = FC/Q Average Variable Cost = VC/Q Increasing output has two opposing effects on average total costs: 1. Spreading Effect: The larger the output, the more output the fixed costs are spread over, resulting in a lower aver...

EC4101 Wk.09 Lec.02 Average Total Cost = TC/Q Average Fixed Cost = FC/Q Average Variable Cost = VC/Q Increasing output has two opposing effects on average total costs: 1. Spreading Effect: The larger the output, the more output the fixed costs are spread over, resulting in a lower average fixed cost. The short run average fixed cost curve will fall sharply at first, then slower. 2. Diminishing Returns Effect: The larger the output, the more variable input required to produce additional units, resulting in a higher average variable cost. The short run average variable cost curve will decrease first and then increase. The marginal cost curve will intersect the average total cost curve at its lowest point. If marginal cost is above average total cost, then the average total cost is rising. If marginal cost is below average total cost, then the average total cost is falling. Long-Run Total Cost: The minimum cost of producing each output level when a firm can adjust all inputs. Scale: The output of the firm when all inputs can be varied. If output increases in the same proportion as input, then the firm faces constant returns to scale. If output increases in more of a proportion than input, then the firm faces increasing returns to scale (economies of scale). If output increases in less of a proportion than input, then the firm faces decreasing returns to scale (diseconomies of scale). Reasons for Economies of Scale: Fixed costs which can be spread out. Specialisation. Large machinery capabilities only acquired due to the increased level of production. Reasons for Diseconomies of Scale: Management becomes more complex as output increases. Geography, expansion requires you to move to another market, which may be more costly than the first. References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: www.quora.com Images 2+3: Economics (12th Ed.) David Begg.