Graphical impact of cost changes on marginal and average costs

In the last video, we numerically studied how changes in productivity or cost might affect your marginal cost, your average variable cost, your average fixed cost, or your average total cost. In this video, we're going to think about it visually.

So, we constructed these curves several videos ago to visualize how average fixed cost trends over time. As you take that fixed cost and then you spread it over more and more and more units, you see that that just asymptotes towards zero. As you get more and more units, you see your marginal cost curve, and this is something that you'll typically see in a lot of textbooks. It's kind of U-shaped, and we talked about where it intersects the average variable cost. That's where the average variable cost goes from trending down to trending up, so it hits that minimum point.

The same thing happens at average total cost; it hits the bottom of that U of average total cost. It goes from trending down to trending up. Then, over time, this difference that you see between your average total cost and your average variable cost, that difference right over there, that is your average fixed cost. Since your average fixed costs are asymptoting downwards, you see that this difference between average total cost and average variable cost gets less and less over time. They are going to, over time, converge to each other as your average fixed cost gets closer and closer and closer to zero.

But now, let's think about how these curves might be impacted if you have changes in productivity or cost. So, let's start with a change in your fixed costs. Let's say your rent goes up. What would happen then? Pause this video and think about what would happen visually. Well, then your average fixed cost would shift up, and it might look something like this. Your average fixed cost might look something like this.

And then what? Which of these other curves also have fixed costs embedded in it? Well, your average total cost is a combination of your average variable cost and your average fixed cost. So, the amount that your average fixed cost went up for any quantity, your average total cost would also go up that amount for that quantity. So, it would look something like this. It would look something like this.

And once again, just as before, it will trend downwards until you intersect with your marginal cost curve, and then it'll start trending upwards. So, a change in your fixed costs, either upwards or downwards, would affect your average fixed cost and would affect your average total costs. The reason why it doesn't affect your average variable cost is because your average variable costs are taking out your fixed costs or just thinking about the variable costs, and your marginal costs are thinking about a difference in costs between two different states of output. The fixed costs are in either of those, so they will cancel out.

What would be a change in your variable cost? Let's say you have to give everyone a pay increase. Well, then your variable costs will go up, and your variable cost might look like something like this. They will just shift up, and once again, they will trend downwards until you intersect with your marginal cost curve, and then you will trend upwards.

Now, a change in your variable cost will also affect your marginal cost because, as you produce more output, you are likely to incur more incremental costs. So, then your marginal cost curve—I know this is getting very messy—might start looking something like this. It might look something like that.

So, big picture changes in productivity would likely affect your average variable cost, likely affect your marginal cost, and, of course, average variable cost feeds into average total cost, so that would be impacted as well. But changes in just your fixed costs would affect your average fixed cost curve and your average total cost.