ECON1101 Chap.7 Production and Cost Curves
Production and Cost Curves
Production and Cost Curves builds the supply side from the ground up. A short-run production function with fixed capital shows marginal product rising with specialisation and then falling with diminishing returns. Dividing the wage by marginal product gives marginal cost, which therefore rises, the course’s explanation for the law of supply.
The chapter defines fixed, variable and total cost, the average cost curves and their U shape, shows why marginal cost cuts each average at its minimum, and lists what shifts market supply. The worked examples use one bakery’s staffing numbers and one smooth cost function so that the table and the curves tell the same story.
What this chapter covers
- 01
Production functions and fixed capital
- 02
Marginal product of labour
- 03
Specialisation and diminishing returns
- 04
Fixed, variable and total cost
- 05
Marginal cost as wage over marginal product
- 06
Average cost curves and their minima
- 07
Market supply and its shifters
Worked example · free
Reading the average and marginal cost curves
- 1AVC = VC/q = 20 − 4q + 0.5q²; at q = 4, AVC = 20 − 16 + 8 = $12.
- 1MC(4) = 20 − 32 + 24 = $12, equal to AVC.
- 1ATC = 72/q + AVC; at q = 6, ATC = 12 + 20 − 24 + 18 = $26.
- 1MC(6) = 20 − 48 + 54 = $26, equal to ATC.
- 1MC meets each average at its lowest point: AVC bottoms out at $12 and ATC at $26.
Key terms
- Production function
- A production function describes the output a firm can make from given quantities of inputs.
- Marginal product of labour
- The marginal product of labour is the extra output from employing one more worker.
- Diminishing returns
- Diminishing returns is the fall in marginal product as more of a variable input is added to fixed capital.
- Fixed cost
- Fixed cost is the cost of inputs that do not vary with output and must be paid even at zero output.
- Average variable cost
- Average variable cost is variable cost divided by the quantity of output produced.
- Willingness to accept
- Willingness to accept is the lowest price at which a seller will supply one more unit, equal to its marginal cost.
Production and Cost Curves FAQ
Why does marginal cost rise in the short run?
With capital fixed, each extra worker adds less output than the one before once diminishing returns set in. The wage is the same, so the cost of each extra unit, the wage divided by marginal product, goes up.
Why does total cost change by the same amount as variable cost?
Fixed cost does not depend on output, so producing one more unit leaves it unchanged. Any change in total cost must come entirely from variable cost, which is why marginal cost can be calculated from either.
Why does the marginal cost curve pass through the minimum of average cost?
An average falls when the next unit costs less than the current average and rises when it costs more. The turning point, the minimum, is where the next unit costs exactly the average, so the curves meet there.
What shifts the market supply curve?
Input prices, technology, the number of sellers and sellers’ expectations. A change in the good’s own price moves sellers along the supply curve instead of shifting it.
What is the difference between the short run and the long run in production?
In the short run at least one input, usually capital such as the building or machines, is fixed and only labour can change. In the long run every input can be adjusted, so there are no fixed costs and the firm can choose a different scale of operation.
Why does marginal product rise for the first few workers?
With very few workers, each person must do every task. Adding workers lets them specialise, each developing skills in a narrower set of jobs, so output per extra worker rises. Once the fixed capital is crowded, diminishing returns take over and marginal product falls.
Exam move
Practise completing a cost table from fixed cost and a variable cost column: average variable, average total and marginal cost at every output, then circle the minimum points and check that marginal cost crosses there. Sketch the three curves in the right order from memory. Finally, connect the chain aloud: diminishing returns, rising marginal cost, upward-sloping supply.
A good final check is to explain, without notes, why average fixed cost always falls, why average variable cost eventually rises, and why the gap between average total and average variable cost narrows as output grows.
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