![]() When this occurs, the long-run average total cost curve will be upward sloping. Many businesses will eventually reach a point where continuing to expand leads to the creation of inefficient bureaucracies, etc. This occurs for many firms as they expand and get more efficient allowing them to minimize average costs. If total revenue is less than total variable costs, the firm will temporarily shut down.Įconomies of scale: When the long-run average total cost curve is downward sloping, higher quantities have a lower average cost. If total revenue is greater than total variable costs, the firm will operate and their losses will be less than fixed costs. Labor, electricity, and raw materials are all examples of variable costs because as more units are produced more money will be spent on labor, electricity, and raw materials. Variable Costs: These are the costs which change with the quantity produced. That is because fixed costs are “sunk costs” meaning they are already lost. Otherwise the firm will temporarily shut down. ![]() A firm will operate as long as losses are less than fixed costs. On a graph, FC are a horizontal line (indicating the same dollar amount for every quantity). Rent, loan payments, insurance, etc will generally be the same whether a firm produces zero units of output or ten thousand. They will be important on most of the Micro Graphs.įixed Costs: These are costs for a firm which do not change with the quantity produced (they remain fixed). ![]() The total cost curves are important, but pay special attention to the average cost curves.
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