The costs of production are what firms take into consideration. They look at fixed costs, variable costs, average cost per unit, and marginal cost when deciding the quantity produced of a good. The chapter then went on to explain/analyze the graphs of each, later showing how social optimum (Qo) could be found from their intersections.
The graphs of each measurement are as follows:
The total cost graph (fixed cost+variable cost) increases. As we produce more, total cost is higher. It is also important to note that TC is the minimum cost of producing the output and it includes a reasonable profit.
Average cost per unit graphs (TC/q) are "U" shaped. As quantity increases, average cost decreases. This downward slope continues until a high level quantity is reached; where variable costs are larger (as the resource gets more scarce).
The Marginal cost (extra cost of producing one extra unit) also increases. For high output levels, MC usually rises w/ output. For low outputs, the curve is flatter and might even decrease due to worker's knowledge, etc. What do they mean by higher and lower output?
This chapter confused me quite a bit. I want to talk more about what happens when the graphs intersect. Also, how to find total cost on different graphs.
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