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## Production and costs in the short run

Current time:0:00Total duration:3:47

# Graphical impact of cost changes on marginal and average costs

AP Micro: PRD‑1 (EU), PRD‑1.A (LO), PRD‑1.A.8 (EK)

## Video transcript

- [Instructor] In the last video, we numerically studied how changes in productivity or cost might affect your marginal cost, your
average variable cost, your average fixed cost,
or your average total cost. In this video, we're gonna
think about it visually. So, we constructed these curves several videos ago to visualize
how average fixed cost trends over time. As you take that fixed
cost and you spread it over more, and more, and more units, you see that that just
asymptotes toward zero as you get more and more units. You see your marginal cost curve, and this is something that you'll typically see in a lot of textbooks. It's kind of u-shaped. And we talked about where it intersects the average variable cost. That's where the average variable cost goes from trending down to trending up. So it hits that minimum point, and the same thing happens
at average total cost. It hits the bottom of that
u of average total cost. It goes from trending down to trending up. And then over time, this
difference that you see between your average total cost and your average variable
cost, that difference right over there, that is
your average fixed cost. And so, since your average fixed cost are asymptoting downwards, you see that this difference between average total cost and average variable cost
gets less and less over time, that they are going to, over time, converge to each other as your average fixed costs gets closer, and closer, and closer to zero. But now let's think about how these curves might be impacted if you have changes in productivity or cost. So let's start with a
change in your fixed costs. Let's say your rent goes up. What would happen then? Pause this video and think about what would happen visually. Well then your average
fixed cost would shift up, and it might look something like this. Your average fixed cost might
look something like this. And then, which of these other curves also have fixed costs embedded in it? Well, your average total
cost is a combination of your average variable cost and your average fixed cost. So the amount that your
average fixed cost went up for any quantity, your
average total cost would also go up that amount for that quantity. So it would look something like this. It would look something like this. And once again, just as before, it will trend downwards
until you intersect with your marginal cost curve. And then it'll start trending upwards. So a change in your fixed costs, either upwards or downwards, would affect your average fixed cost and would affect your average total cost. The reason why it doesn't affect your average variable cost is because your average variable cost are taking out out your fixed costs. They're just thinking
about the variable costs. And your marginal costs are thinking about a difference in costs
between two different states of output. And the fixed costs
are in either of those, so they will cancel out. What would be a change
in your variable costs? Let's say you have to give
everyone a pay increase. Well then your variable costs will go up. And your variable costs might look like something like this. They will just shift up. And once again, they will trend downwards until you intersect with
your marginal cost curve, and then you will trend upwards. Now, a change in your variable costs will also affect your marginal costs. Because as you produce more output, well then you are likely to incur more incremental costs. So then your marginal costs, and I know this is getting very messy, might start looking something like, might look something like that. So, big picture, changes in productivity would likely affect your
average variable cost, likely affect your marginal cost, and of course, average variable cost feeds into average total
cost, so that would be impacted as well. But changes in just your fixed cost would affect your average fixed cost curve and your average total cost.