fc and vc changes
DESCRIPTION
Why Marginal Cost curve DOES NOT SHIFT when Fixed Costs change and why do BOTH MC and ATC curves shift when there is a change in Variable CostsTRANSCRIPT
Using this Cost data we first want to see how changes to Fixed Costs AND Variable Cost will affect the ATC and the MC curves
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
We will look at this in terms of the Firm that operates in a “Perfectly Competitive” Market.
The firm is a Price Taker (“P=MR=AR=D*). The price will stay constant in this example.
“A”
Assume Fixed Costs INCREASE by $100. The most commonly asked question on the AP Micro test is for a change in “Lump Sum Taxes”. This is considered a Fixed Cost as it is spread out over ALL units produced.
IMPORTANT NOTE: Fixed Costs INCREASE. Total Costs INCREASE, ATC INCREASE…BUT…Marginal Costs ARE NOT AFFECTED!! Read that again…
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
“A”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
NOTE: The Profit MaximizingQuantity STAYS THE SAME eventhough the ATC has shifted up.
Profit Maximizing Rule:(or Loss Minimizing)
MR =MC still holds at that is at Qf*
“A”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
Since the ATC curve has shifted UP , the Average Total Cost of producing “Qf*” units of this good is “ATC 1”
This is MORE than the firm is receiving for each unit.
The Firm is incurring ECONOMIC LOSSES
ATC 1
“A”
“B”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
Since the ATC curve has shifted UP , the Average Total Cost of producing “Qf*” units of this good is “ATC 1”
This is MORE than the firm is receiving for each unit.
The Firm is incurring ECONOMIC LOSSES
ATC 1 Area of Economic Loss “A”
“B”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
A “Lump Sum SUBSIDY” would work in the opposite way. It would DECREASE Fixed Costs and the ATC* curve would shift DOWN, indicating a DECREASE in ATC (ATC 1)
The firm is now making ECONOMIC PROFIT(ATC 1 is LESS than the price the firm is receiving)
Toggle back and forth between this slide and the last to see the difference in the two situations.
ATC 1
ATC 1
Area of Economic PROFIT
“A”
“B”
How a change in MARGINAL COST affects the cost curves.
A change in Marginal Costs will affect BOTH the Marginal Cost curve And the Total Cost curve.
The most commonly asked question, in regards to cost curves, on the AP Micro Test is how a change in “Per Unit Taxes or Subsidies” affect the Cost Curves.
Output(Q)
Total Fixed Cost(TFC)
Total Variable Cost(AVC
Total Cost(TC)
Marginal Cost(MC)
Average Total Cost(ATC)
1 $100 $50 $150 ---- $150
2 $100 $80 +$2=$82 $180 ($182) $30 ($32) $90 ($91)
3 $100 $100 +$3=$103 $200 ($203) $20 ($21) $66.66 ($67.66)
4 $100 $110+$4=$114 $210 ($214) $10 ($11) $52.50 ($53.50)
5 $100 $150=$155 $250 ($255) $40 ($41) $50 ($51)
6 $100 $220=$226 $320 ($326) $70 ($71) $53.33 ($54.33)
7 $100 $350=$357 $450 ($457) $130 ($131) $64.29 ($65.29)
Using the same data, we now look at how a “Per Unit Tax” will affect theCost curves. A Per Unit Tax affects the cost of each additional unit produced.
IT IS A VARIABLE COSTAssume $1.00 is the PER UNIT TAX.
The MC of producing EACH UNIT Is now GREATER at each
level of production
ATC is GREATER at eachlevel of production
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
Average Total Costs (ATC) INCREASE. ATC curve shifts UP (“ATC 1”)
“A”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
Marginal Costs INCREASE. Marginal Cost curve shifts UP (to the LEFT to “MC 1”).
MC 1
“B” “A”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
MC 1
“B” “A”
Find the NEW Profit Maximizing Quantity.MR = MCPoint “B”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
MC 1
“B” “A”
Qf 1
Find the NEW Profit Maximizing Quantity.MR = MCPoint “B”
Because the MC curve Shifted we will have a new Profit Maximizing Quantity !!
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
Because the Average Total Cost (“ATC 1”) is GREATER than the Price the firm is experiencing “Economic Losses”
MC 1
“B” “A”
Qf 1
“C”ATC 1
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
Because the Average Total Cost (“ATC 1”) is GREATER than the Price the firm is experiencing “Economic Losses”
MC 1
“B” “A”
Qf 1
“C”ATC 1 Area of
Economic Losses
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing.
“A”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing.
“A”
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing.
MC 1
“A”
Qf 1
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing.
MC 1
“B”“A”
Qf 1
“C”ATC 1
Price
Quantity
P=MR=AR =D*
ATC*
MC*
Qf*
FIRM
ATC 1
A PER UNIT SUBSIDY would do the exact opposite. It will Decrease the ATC AND the Marginal Cost of Producing.
MC 1
“B”“A”
Qf 1
“C”ATC 1
Area of Economic Profit