Sunday, October 28, 2018

Demand and Supply: Part 2

In the previous post, there was a table of coefficients for average cost (AC), total cost (TC) and marginal cost (MC). Let's decompose TC into two components: one that doesn't vary as quantity (Q) varies and another that does. We'll call the components total fixed cost (TFC) and total variable cost (TVC). We can also decompose AC into average fixed cost (AFC) and average variable cost (AVC)

Q-1 a a 0       0
Q0 b 0 b a a 0 b
Q1 c 0 c b 0 b 2c
Q2 d 0 d c 0 c 3d
Q3       d 0 d

AFC: \(p = \frac{a}{q}\)
AVC: \(p = b + cq + dq^2\)
TFC: \(p = a\)
TVC: \(p = bq + cq^2 + dq^3\)

Note how \(AC = AFC + AVC\) and \(TC = TFC + TVC\)
Note too how MR is unrelated to TFC, but has the same relation to both TC and TVC.

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