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# How costs change when fixed and variable costs change

AP.MICRO:
PRD‑1.A.3 (EK)
,
PRD‑1.A.4 (EK)
,
PRD‑1.A.5 (EK)
,
PRD‑1.A.6 (EK)
,
PRD‑1.A.7 (EK)

## Video transcript

in the last few videos we were studying our watch factory ABC watch Factory and based on some data knowing what our fixed costs are our labor units our variable costs our total costs and then our total output and that would be for different amounts of labor we were able to calculate marginal product of labor marginal cost average variable cost average fixed cost and average total cost what we're going to do in this video is start to explore how these various calculations will change or and eventually how these curves will change based on changes in cost and productivity so let's say our rent has gone up by two thousand dollars a month and we have to pay that extra rent regardless of what our output is so what's what is that going to do to marginal product of labor marginal cost average variable cost average fixed cost and average total cost pause this video and think about what's going to happen before we actually model it in this spreadsheet by raising our fixed costs our monthly fixed costs so we are going to go from five thousand dollars a month of fixed cost to seven thousand dollars a month a fixed cost so it's going to be seven thousand but we're not done yet we want to scroll all the way down and so what changed from what I had before well if you were paying close attention your marginal product of labor hasn't changed your marginal cost haven't hasn't changed your average variable cost hasn't changed your average fixed and average total costs did change and that should hopefully make intuitive sense if you look at the formulas for these things for example the marginal product of labor you would see that it involves total output and the labor units it doesn't involve the fixed cost at all so if the fixed cost change you wouldn't expect our marginal product of labor to change when you look at marginal cost you are involving total cost and you say hey is it fixed cost part of total costs but remember fixed costs is the seven thousand dollars as part of the 13,000 and it's part of this 9,000 right over here so when you take the 13,000 minus the 9000 which we do in the numerator right over here we're doing our change in total costs over our change in output those 7 to \$7000 cancel out the fixed cost cancel out and so your marginal cost is not dependent on your fixed cost similarly your variable cost is separate you can view in a lot of ways from your fixed costs so your average variable costs aren't going to be affected by fixed cost and of course you would expect your average fixed costs to to change because that is directly derived from your fixed costs and your output and then average total costs are also derived from total costs it's not a change between total costs and that total cost has the fixed cost in it so you might be asking yourself well what would change your marginal product of labor your marginal cost your average variable cost or your average total costs well think about a change in labor productivity let's say that each person there's some there's some magical new device that allow the new process that allows them to be a little bit more productive well then one person instead of producing 10 let's say they now produce 11 and let's say two people is not instead of 25 can now produce 27 let's say and three people instead of forty-five can now produce 47 and now four people and I'm making these numbers up they cannot produce 59 let me say that this is 66 and then let's say that this is 72 and so notice that did change our marginal product of labor and once again marginal product of labor is based on the difference in total output as we have a difference in our labor units and that change in productivity it might be more pronounced than the way I just happen to pick the numbers it was more pronounced when you have fewer people and then it got more diminished as you had more and more people but when you had that change in productivity you might have noticed that that changed our marginal cost and that changed our average variable costs because once again your marginal costs if we look at it right over here it is calculated by looking at your change in total cost divided by your change in total output and when we had this productivity improvement our change in total output improved now there could be a situation where you have a productivity improvement but the change in total output from one person to the next might not change so it's not always going to change either the marginal product of labor or the marginal cost but changes in productivity will often change those two things and similarly if you look at your average variable cost it is based on your variable cost in your output when you have this productivity improvement that's going to improve your output for any given amount of a variable cost and so that's going to have an effect on your average variable cost and then your average total cost is of course based in part on your total variable cost which is driven by that productivity improvement similarly you could have changes in variable cost let's say all of the people who work at your factory have gotten together and said we want to raise and you give in and you you give a raise well now instead of \$2,000 per worker it's going to cost \$2,200 per worker you gave a 10% raise per month and so let me get that all the way down and notice the things that you would have expected to change did change your marginal product of labor didn't change because marginal product of labor is not driven by cost it only looks at the labor units and the total output but your marginal cost did change even though our output for every incremental person did not change because the underlying cost of the people changed similarly the average variable cost you would of course expect it to change because our variable costs all went up by 10% your average fixed cost isn't going to be affected because we changed the variable cost not the fixed and the total costs were of course affected because the average variable costs were affected