# Chapter 22 The Costs of Production by ewghwehws

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```									    Costs in a Graph

The curves we consider here are
the ones used the most in our
economic analysis.

1
Graphs
We will use a graph here because lots of information can be
packed into one graph. The graph on the next screen is a
general graph and is consistent in a general sense with the
example we saw in the previous section of notes.
In the graph, heights of curves mean one thing and areas of
rectangles mean something else. Let’s go there next.

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Cost concepts in a graph
unit costs
\$            ATC1     MC          ATC

b
AVC

AVC1
a           MC1
Q

Q1

3
Interpretation
I have picked Q1 arbitrarily and have
drawn a line from this Q up to the
highest cost curve.
 MC1 is the MC of the this unit.
 AVC1 is the AVC of all the units.
 ATC1 is the ATC of all the units.

4
Interpretation continued
 Since TC = TFC + TVC, ATC = AFC +
AVC or AFC = ATC - AVC.
 So in the diagram, AFC1 = ATC1 -
AVC1.
 Area a = AVC1 times Q1 = TVC1.
 Area b = (ATC1 - AVC1) times Q1 =
TFC1.

5
Interpretation continued
 Area  a + b =TVC1 + TFC1 = TC1.
 The concept of diminishing returns is
the primary force driving costs in the
short run. The rest of the ideas are
definitions. The u - shape of the curves
are due to the diminishing returns
concept.

6

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