Graphical impact of cost changes on marginal and average costs

0:00- [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.

0:23As 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.

0:36It'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.

0:51It 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.

1:24But 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.

1:39Well 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.

1:58So 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.

2:15And 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.

2:30They'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?

2:45Let'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.

3:04Now, 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.

3:25So, 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.