TYPICAL COST CURVES

Inthe examples we have studied so far, the firms exhibit diminishing marginal product and, therefore, rising marginal cost at all levels of output. This simplifying assumption was useful because it allowed us to focus
on the key points. Yet actual firms are often a bit more complicated than this. In many firms, diminishing marginal product does not start to occur immediately after the first worker is hired. Depending on the production process, the second or third worker might have higher marginal product than the first because a team of workers can divide tasks and work more productively than a single worker. Such firms would first experience increasing marginal product for a while before diminishing marginal product sets in.

Figure 5 shows the cost curves for such a firm, including average total cost (ATC), average fixed cost (AFC), average variable cost (AVC), and marginal cost (MC). At low levels of output, the firm experiences creasing marginal product, and the marginal-cost curve falls. Eventually, the firm starts to experience diminishing marginal product, and the marginal-cost curve starts to rise. This combination of increasing then diminishing marginal product also makes the average-variable-cost curve U-shaped.

Figure 5 Cost Curves for a Typical Firm

Many firms experience increasing marginal product before diminishing marginal product. As a result. they have cost curves shaped like those in this figure. Notice that marginal cost and average variable cost  for a while before starting to rise. • Marginal cost eventually rises with the quantity of output.

• The average-total-cost curve is U-shaped.

• The marginal-cost curve crosses the average-total cost curve at the minimum of average total cost.

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