Cost Curves

Importance of relation between marginal and average cost curves

• The amount of output/quantity of output is determined by the producer.
• It is of utmost importance for the producer to decide the range of this output in terms of cost efficiency in terms of quantity output.
• This can be identified as region around the point of intersection of the Marginal Curve and The Total Cost Curve
• This forms important decision for a firm

Reasonable Expansion Path of a Firm

Start with a small factory as the demand increases, firm moves to medium factory and next with increase in demand again moves to large factory.

Economies of Scale

• It is a part of the 'Long Run Total Average Cost Curve'
• As and when your production (output volume) increase, the average total cost(ATC) keeps falling

• Reasons for this could be many: bulk purchases(cost advantages), technological innovation, and etc.

  Example

  This is the region when 10 units are produced at cost of 1 unit of ATC

Constant Returns of Scale

• This is the region of 'Long Run ATC' for 1 unit of production 1 unit of ATC is incurred.
• It is a one-one relation
• Most firms operate in this region

Diseconomies of Scale

• It is a part of the 'Long Run Total Average Cost Curve'

• As output volume of production is increased, with respect to this; the ATC increase is by a factor of more than that of the production.

  Example

  2% increase in output will result in 6% increase in total costs