Curves of costs

Short-run marginal cost (MC) curve

• At first decline and then go up at some point, and intersect the average total cost and average variable cost curves at their minimum points.

Average variable cost (AVC) curve

• Go down (but will not be as steep as the marginal cost), and then go up. This will not go up as fast as the marginal cost curve.

Average fixed cost (AFC) curve

• Decline as additional units are produced, and continue to decline.

Average total cost (ATC) curve

• Initially decline as fixed costs are spread over a larger number of units, but go up as marginal costs increase due to the law of diminishing returns.

The marginal revenue curve

• Horizontal and equal to price for price takers (pure competition), and downward sloping and below demand curve for a price searcher (monopolistic competition, oligopoly, or monopoly).

Factors that Cause Cost Curves to Shift

• Increase in prices of resources => shift upwards.
• Increase in Taxes => shift updwards
• Tax on variable input shifts MC, AVC, & ATC. Fixed tax shifts AFC & ATC.
• Cost-reducing technological improvements => shift downwards.
• Which curves to be shifted depend on whether the technology affects fixed or variable costs.