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Main content
Current time:0:00Total duration:8:44
AP.MICRO:
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Video transcript

in the previous video we began our study of ABC watch Factory and we tried to understand the economics of the business based on some data that we had already collected on our costs and how much output we can produce based on how many labor units we had and then from that we calculated things like the marginal product of labor the marginal cost the average variable cost the average fixed cost and the average total cost what we're going to do in this video is take this information especially total output and all of these things that we just calculated and we're going to graph it so that we can better appreciate how these various calculations and the curves that we can get from the calculations are interrelated so let me scroll over a little bit so we have some space and then let me set up a little coordinate plane here and so what we have on our vertical axis this is our cost and then down here in our horizontal axis this is our output so first let's just hand graph it and I encourage you to go through the exercise yourself it's one thing to watch me do it but when you actually graph something you digest the numbers that much better and so let's start with marginal cost and I'm going to do it in this blue green color so let's see when our total output is 25 our marginal cost is 267 so when our output is 25 - 67 would be right about there and we're just trying to get be able to visualize what's going on and then when our total output is 45 our marginal cost is 150 dollars so 45 is here and then 150 is right about there and then when our total output is 58 our marginal cost is 231 so 58 is right about there and then it's going to be 231 so it's about right about there and then when our total output is 65 our marginal cost is 4 29 so 65 is right over there and then 429 will get us right about right about there so we see our marginal cost is going up a lot now might be a little bit lower than that so it's gonna be right over there and then last but not least when our total output is 70 our marginal cost is $600 so at 70 we get to 600 and I'm eyeballing it now it's not exact graph paper but this gives you a sense of what the marginal cost curve looks like and here we've kind of graphed it based on where we are in terms of output so that's our marginal marginal cost curve so I'll just label that marginal cost and now let's see how that relates to the curves for average variable cost and average total cost so average variable cost I'll do in this orange color so at an output of 25 our average variable cost is $240 so 25 we are going to be at 240 dollars which is right about right about there and then when we are at 45 units our average variable cost is 200 it's at 45 units our average variable cost is right over there and then add we did that one and then at at 58 units its 207 58 units it is 207 so it's going to be right about there and then at we did this one and at 65 units it's 230 165 is and then we get to 231 which is right maybe about there and then as we did this one and then at 70 units we're at 257 so 70 units 257 looks something like this now before I actually draw in this curve connect the dots let's just think about how the average variable cost relates to the marginal cost when the marginal cost is less than the average variable cost well that means that as we do more as we produce more and more our average variable costs should go down and we see that happening in this early stage I won't go into all the details of what's happening exactly right over there but that early stage as we see that while while our marginal cost is less than our average variable costs our average variable cost is trending down and that makes sense every incremental unit is getting is a little bit cheaper to produce what brings down the average but as soon as the marginal cross as soon as the marginal curve crosses the average variable cost and the marginal cost every incremental unit is now more than the average well that should bring up the average and so then the average variable cost should start sloping up so it's good to realize one is a rule of thumb but even more important to realize why that where the marginal cost curve and the average variable cost curve intersect that that's going to be the point at which the average variable cost goes from trending down to trending up if you view it as this very wide you shape that would be the bottom of the U and we could do the same thing with average total costs now they're going to cross a little bit later because the average total costs are higher because they're fracturing in the fixed costs as well but you can imagine that while your marginal costs are lower than your average total cost every incremental unit is going to bring down the average total cost but as soon as the marginal cost crosses the average total cost it's going to start bringing up the average and we can see that by trying to graph average total cost and I'll do that in this yellow color so at 25 units were at for 40 25 units or at for 40 that makes sense because we have all that fixed cost that we're spreading along amongst not that many units and then at 45 units we're at 3 1145 we get to 311 might be right around there then at 58 units we're at 293 58 units we are at 293 which is right about there and then at 65 units were at 308 65 units we are at 308 and then at 70 units we're at 329 70 units we are at 329 so maybe something like this and so this is our average total cost and just as you could imagine while your marginal costs every incremental unit the cost of that is less than your average total cost it'll bring down every when you do that incremental output it will bring down your average total costs until the point that they cross and then now after you craw after these two curves cross now every incremental unit is bringing up the average cost it's costing more than the average and so once again where these two curves intersect if you view the average total cost curve is this big wide you it would represent the bottom of the you now the last thing that we didn't graph and this is maybe the most intuitive is the average fixed cost and this is just going to ask them tote down at 25 units were at 225 units we are at 200 at 45 units we're at 111 45 111 s maybe right over there at 58 units were at 86 58 units 86 at 65 units we're at 77 65 units 77 and then at 70 units were at 71 and so you can see that that just gets lower and lower and lower over as you produce more and more output because you're able to spread those fixed costs amongst more and more output so that makes sense that the average fixed cost just trends downward like this the entire time but the big takeaways here is not just to understand the rule of thumb that where the marginal cost curve intersects the average variable cost or the average total cost that that's the you could view it as the minimum point of the average total cost or the average variable cost curves but to understand why that is happening
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