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Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

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Short run cost curves (3)

Activity 23b

This time, click on the quantity axis in the figure to identify the level output where the difference between average cost and average variable cost is smallest.

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Figure 39 Average cost curves (3)
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Discussion

The difference between average cost (AC) and average variable cost (AVC) is least when output is high, in this case at a quantity of 10 000/day (see the black arrow on the figure below). This is the same as spotting that average fixed costs (AFC) are lowest when output is high, because: AC – AVC = AFC. In the short run, if output were to continue to increase beyond a quantity of 10 000/day then we would expect AFC to become smaller and smaller, and so make a smaller and smaller contribution to AC.

Described image
Figure 40
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This diagram shows the same curves as the previous diagram. It has ‘Cost £s per day’ on the vertical axis, and it is marked from zero to 2500, at intervals of 500.

The horizontal axis is labelled ‘Quantity, thousands per day’ and this is marked from zero on the left up to 10 on the right, at intervals of one.

Three curves are shown, one above the other. The upper curve is labelled ‘AC’. AC starts at a plot of 1000 Quantity, 2000 Cost. The curve slopes down steeply at first before gradually getting shallower to reach a minimum point at just over 5000 Quantity, 900 Cost. The curve then rises gradually.

The middle of the curves lies below AC and is labelled ‘AVC’. AVC starts at a plot of 1000 Quantity, 1250 Cost. Its downward slope is shallower than AC and it reaches its minimum point at 4500 Quantity, 800 Cost. The curve then rises, with almost the same upward slope as the AC curve. It very gradually runs closer to the AC curve that lies just above it.

The lower curve is labelled ‘AFC’. AFC starts at a plot 1000 Quantity, 750 Cost. This curve slopes steeply down initially for a very short distance but it then becomes almost flat, with a very shallow downward slope. The curve ends just above the horizontal axis.

On this diagram, one vertical upward black arrow is shown, running from the end of the horizontal axis at output 10,000 up to the AVC curve.

Figure 40