Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

160 COSTS OF PRODUCTION [CHAP. 7
The AVC, AC, and MC curves include implicit and explicit costs and give the minimum per-unit costs of
producing various levels of output. The shape of the AVC, AC, and MC can be explained by the law of diminishing
returns. As we will see in Chapter 9, when factor prices change, the AVC, AC, and MC curves shift up
if factor prices rise and down if factor prices fall.
Fig. 7-11
(c)
The AVC and AC curves are U-shaped. Since AC equals AVC plus AFC, the vertical distance between the AC
and the AVC curve gives AFC. Thus a separate AFC curve is not needed and is not usually drawn. Note that as
output expands, the vertical distance between the AC and the AVC curve (i.e., AFC) declines. This is always true.
The MC curve is also U-shaped, and it reaches its minimum point before the AVC and the AC curves. MC is
below AVC when AVC is falling, equals AVC at the lowest point on the AVC curve, and is above AVC when
AVC is rising. Exactly the same relationship exists between the MC and the AC curves, the AC curve reaches its
minimum point after the AVC. This is due to the fact that, for a while, the falling AFC overwhelms the rising
AVC.
A figure such as the one in this problem which shows the MC, the AVC, and the AC curves will be used a
great deal in Chapters 9 to 12. What is important in the figure is the relationship between the various curves rather
than the actual values used in drawing them.