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Decisions Facing Firms 3. 2. 1. 3. 2. 1. *Determines production costs The price of inputs* Techniques of production available* The price of output INFORMATION The quantity of each input to demand How to produce that output (which technique to use) The quantity of output to supply are based on DECISIONS
The total variable cost curve is a graph that shows the relationship between total variable cost and the level of a firm’s output.
The total variable cost is derived from production requirements and input prices.
Derivation of Total Variable Cost Schedule from Technology and Factor Prices
The total variable cost curve shows the cost of production using the best available technique at each output level, given current factor prices.
$10 $18 $24 (14 x $1) = (6 x $1) = (10 x $1) = (6 x $1) = (6 x $1) = (4 x $1) = (4 x $2) + 10 4 B output TOTAL VARIABLE COST ASSUMING P K = $2, P L = $1 TVC = ( K x P K ) + ( L x P L ) UNITS OF INPUT REQUIRED (PRODUCTION FUNCTION) USING TECHNIQUE PRODUCT (2 x $2) + 6 2 B output (6 x $2) + (9 x $2) + (7 x $2) + (4 x $2) + $26 $20 $12 14 6 6 4 L 6 B output K 9 A Units of 3 7 A Units of 2 Units of 4 A 1
At any market price, the marginal cost curve shows the output level that maximizes profit. Thus, the marginal cost curve of a perfectly competitive profit-maximizing firm is the firm’s short-run supply curve.