This lesson will examine the relationships between a firm’s short-run, per-unit costs of production: the marginal costs, average variable and average total costs of production (as well as, although not explicitly, the average fixed cost).
Previous lessons have explored the law of diminishing marginal returns, its effect on the productivity of a variable resource in the short-run (assumed to be labor) and how productivity and costs are related:
- SHORT-RUN PRODUCTIVITY, COSTS AND THE LAW OF DIMINISHING MARGINAL RETURNS
- UNDERSTANDING THE RELATIONSHIPS BETWEEN TOTAL, MARGINAL AND AVERAGE PRODUCT
- THE LAW OF DIMINISHING RETURNS IN A TOY TRUCK FACTORY
This lesson focuses on just the per-unit cost curves, their shapes, and the relationships between them. As you will see, the marginal cost curve, itself shaped by the law of diminishing returns, intersects the average cost curves at their lowest points, which as we will see in later lessons enables producers to choose a level of output at which their per unit production costs are minimized, enabling firms to make decisions that allow them to optimize their output for profit-maximization.