ECB1101 · Introductory Microeconomics
Production and Costs
Supply curves come from a firm's costs, so before asking how much a firm should produce we turn a production process into cost curves. In the short run at least one input is fixed: the production function Q = f(L) shows output from labour, and because the fixed factory is spread ever thinner, each extra worker eventually adds less — diminishing marginal product. From total cost we build the cost family: TC = FC + VC, then ATC = TC/Q, AVC = VC/Q, AFC = FC/Q, and MC = ΔTC/ΔQ. The geometry the exam tests: MC cuts AVC and ATC at their minimum points; AFC (the ATC−AVC gap) shrinks as Q rises; ATC never touches the Y-axis; min AVC sits left of min ATC. The MP↔MC mirror (MC = w/MP) explains every shape. In the long run all inputs vary, so there is no fixed cost; the U-shaped LRAC comes from returns to scale (economies then diseconomies), not diminishing marginal product.
What this chapter covers
- 018.1 The production function & diminishing marginal product
- 028.2 The cost family — TC, ATC, AVC, AFC, MC
- 03The geometry: MC cuts ATC and AVC at their minimums
- 048.3 The MP↔MC mirror (MC = w/MP)
- 05Building the cost table from workers→output (worked)
- 068.5 Short run vs long run — which inputs are fixed
- 078.6 Economies & diseconomies of scale — the U-shaped LRAC
Worked example: building the cost family from a production table
- +2(a) VC = w × L, so TC = FC + VC. At 4 workers: TC = 200 + 100×4 = $600. At 5 workers: TC = 200 + 100×5 = $700.
- +1(b) ATC = TC/Q. At Q = 120: 600/120 = $5.00. At Q = 140: 700/140 = $5.00.
- +1(c) MC = ΔTC/ΔQ over this step = (700 − 600)/(140 − 120) = 100/20 = $5.00.
- +1Since MC = ATC = $5.00 right at the ATC minimum (Q = 140), this confirms the rule: MC crosses ATC at the ATC minimum — below it ATC falls, above it ATC rises.
Key terms
- Production function
- Q = f(L), the most output obtainable from given inputs. In the short run at least one input (the factory) is fixed, so adding workers eventually yields diminishing marginal product (MP = ΔQ/ΔL falls) as the fixed input is spread thinner.
- The cost family
- From total cost: TC = FC + VC; ATC = TC/Q; AVC = VC/Q; AFC = FC/Q (so ATC = AVC + AFC); MC = ΔTC/ΔQ. These five curves and the relationships between them are the procedural core of the chapter.
- Marginal cost (MC)
- The extra cost of one more unit, ΔTC/ΔQ. With a constant wage MC = w/MP, so MC is the mirror of marginal product. MC cuts AVC and ATC at their minimum points: below the average it pulls it down, above it pushes it up.
- Average fixed cost (AFC)
- FC/Q — the vertical gap between ATC and AVC. Because fixed cost is spread over more units as Q rises, AFC falls toward zero, so ATC and AVC squeeze together at high output and ATC never touches the Y-axis.
- Returns to scale
- What happens to average cost when every input is scaled up together (the long run, where nothing is fixed). Economies of scale make LRAC fall, diseconomies make it rise, tracing the U-shaped LRAC — a different cause from the short-run U (diminishing marginal product).
Production and Costs FAQ
Where does MC cross ATC and AVC, and why does it matter?
MC cuts both ATC and AVC at their MINIMUM points. The logic is the general marginal-vs-average rule: when marginal is below the average it drags the average down, when above it pushes the average up, so they must cross exactly at the bottom. This is your fastest way to locate min ATC. One refinement: min AVC sits to the LEFT of min ATC, because ATC keeps being dragged down by falling AFC after AVC has already bottomed out.
What's the difference between the short run and the long run here?
It's not the calendar — it's which inputs the firm can change. In the short run at least one input is fixed (the factory, the lease), giving a fixed cost FC and the AFC = FC/Q term. In the long run ALL inputs vary, so there is no fixed cost and no AFC; the question shifts from 'how many workers?' to 'how big a plant?'. This matters because the source of the U-shape changes: the short-run U comes from diminishing marginal product (one fixed input), the long-run U comes from returns to scale.
Why is the long-run average cost curve U-shaped?
Because of returns to scale, NOT diminishing marginal product (a common true/false trap). Scale every input up together: economies of scale (spreading setup, specialisation) make output rise more than proportionally, so LRAC falls; eventually diseconomies of scale (coordination and management get harder) make it rise. The bottom of the U is the minimum efficient scale. Diminishing marginal product needs a FIXED input, and in the long run nothing is fixed, so it can't be the cause of the long-run U.
What does the MP↔MC mirror tell me?
Marginal product and marginal cost are two sides of one coin: when an extra worker is very productive (MP high), the extra output is cheap (MC low). With a constant wage w the link is exact, MC = w/MP, so the MC curve is just the MP curve flipped upside down. MP rising means MC falling; MP at its maximum means MC at its minimum; MP falling (diminishing returns) means MC rising. Reciting this chain lets you explain the shape of every short-run cost curve without memorising any of them.
Exam move
Week 8 is procedural, so the marks are free if you fill the table carefully. From a workers→output table, build VC = wage × L, then TC = FC + VC, ATC = TC/Q, MC = ΔTC/ΔQ. Then name the patterns the marker wants: MP rises then falls (diminishing marginal product), and via MC = w/MP the MC curve mirrors it; MC cuts AVC and ATC at their minimums; AFC (the gap) shrinks; ATC never touches the Y-axis; min AVC sits left of min ATC. Keep the two U-shape stories separate — the short-run U is diminishing MP, the long-run U is returns to scale — because the exam likes to swap them.
