Micro 3/14

Equations

  • Total Cost = total fixed cost + total variable costs
  • Average Total cost (ATC) = TC / Q
  • AVC = TVC / Q
  • AFC = TFC / Q
  • ATC = AVC +AFC
  • MC = change in total cost / change in Q

shift cost curves

  • cost of inputs (increase in minimum wage leads to MC shift left, ATC up, AVC up)
  • technology (more technology, cost goes down)
  • taxes (cost goes up)
  • subsidies (cost goes down)

Long Run

  • TFC = 0
  • Long run is when your fixed cost is gone
  • TC = VC
  • Economies of scale (electric company) as quantity goes up, Average Total Cost goes down
  • Diseconomies of Scale: as quantity rises, ATC goes up

Why Economies of scale

  • high startup costs
  • Bulk (or quantity) discounts
  • Mass production
  • learning by doing
  • Specialize
  • Economies of scope: cost sharing across products (using same light bulb for 7 different vehicles… gets you better bulk discount)

Why Diseconomies of scale (why do costs go up)

  • Organizational complexity (company so large, communication sucks)
  • Increase shirking (goofing off)
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