An increase in the price of the variable input results in ...

Shifts in Cost Curves

An increase in the price of the variable input results in the AVC (average variable cost),

ATC (average total cost) and MC (marginal cost) moving up together. The curves

retain their shape and relative orientation.

An increase in the price of the fixed input results in only the ATC moving up. The curves

retain their shapes and MC continues to intersect the new ATC at its minimum.

An improvement in technology shifts one or more of the cost curves down depending on the

exact nature of the change. The MC continues to intersect ATC and AVC at their minimums

and the difference between ATC and AVC is still AFC (average fixed cost).

Average Variable Cost (AVC)

and Average Total Cost (ATC)

are u-shaped curves and the

vertical difference between them

is AFC (average fixed cost)

and this decreases as quantity

increases. Both these curves are

intersected at their minimum

points by Marginal Cost (MC),

which slopes upward.

If the price of the variable

input increases all three cost

curves move upwards as shown

alongside. They retain their shape

and characteristics as described

above.

MC intersects the new ATC and

AVC at their minimums and the

difference between ATC and AVC

is still AFC.

If the price of the fixed input

increases only the ATC moves

upwards as shown alongside. The

curves retain their shape and

characteristics as described

above.

MC intersects the new ATC and

the old AVC at their minimums

and the difference between ATC

and AVC is still AFC.

If technology improves one or

more of the cost curves move

downward as shown alongside.

All three curves retain their shape

and characteristics as described

above.

The exact nature of the shift

depends on whether technology

makes labor more productive,

capital more productive or some

combination of the two.

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