Costs of Production

• Costs of production can be graphed with cost on the y-axis and quantity of output on the x-axis.
• Firms’ decisions are based on average cost and marginal cost.
• The average fixed cost curve takes a downward sloping shape as output rises.
• The marginal cost curve usually comes in a tick shape due to diminishing marginal returns.
• The marginal cost curve must meet the average cost curve at the lowest point of that average cost curve, creating a U-shaped average cost curve.

This module discusses the costs of production and how they can be graphed on a diagram. The focus is on the average cost and marginal cost curves, which are more important for firms’ decision-making than fixed, variable, and total costs. The average fixed cost curve slopes downward as output rises, while the marginal cost curve slopes upward due to diminishing marginal returns. The average total cost curve is U-shaped because when the marginal cost is lower than the average cost, the average cost falls, and when the marginal cost is higher than the average cost, the average cost rises. The marginal cost curve meets the average cost curve at its minimum point, which is the most efficient level of output.