I n t h I s c h a p t e r y o u w I l L

OST
C
OST
C
OST
C
OST
C
OST
0
$ 3.00
$3.00
$ 0.00
—
—
—
$0.30
1
3.30
3.00
0.30
$3.00
$0.30
$3.30
0.50
2
3.80
3.00
0.80
1.50
0.40
1.90
0.70
3
4.50
3.00
1.50
1.00
0.50
1.50
0.90
4
5.40
3.00
2.40
0.75
0.60
1.35
1.10
5
6.50
3.00
3.50
0.60
0.70
1.30
1.30
6
7.80
3.00
4.80
0.50
0.80
1.30
1.50
7
9.30
3.00
6.30
0.43
0.90
1.33
1.70
8
11.00
3.00
8.00
0.38
1.00
1.38
1.90
9
12.90
3.00
9.90
0.33
1.10
1.43
2.10
10
15.00
3.00
12.00
0.30
1.20
1.50
T
HE
V
ARIOUS
M
EASURES OF
C
OST
: T
HIRSTY
T
HELMA
’
S
L
EMONADE
S
TAND
f i x e d c o s t s
costs that do not vary with the
quantity of output produced
v a r i a b l e c o s t s
costs that do vary with the quantity
of output produced

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2 7 8
PA R T F I V E
F I R M B E H AV I O R A N D T H E O R G A N I Z AT I O N O F I N D U S T R Y
AV E R A G E A N D M A R G I N A L C O S T
As the owner of her firm, Thelma has to decide how much to produce. A key part
of this decision is how her costs will vary as she changes the level of production.
In making this decision, Thelma might ask her production supervisor the follow-
ing two questions about the cost of producing lemonade:
◆
How much does it cost to make the typical glass of lemonade?
◆
How much does it cost to increase production of lemonade by 1 glass?
Although at first these two questions might seem to have the same answer, they do
not. Both answers will turn out to be important for understanding how firms make
production decisions.
To find the cost of the typical unit produced, we would divide the firm’s costs
by the quantity of output it produces. For example, if the firm produces 2 glasses
per hour, its total cost is $3.80, and the cost of the typical glass is $3.80/2, or $1.90.
Total cost divided by the quantity of output is called