Answer to Question #229992 in Microeconomics for Jay

Question

With an aid of a diagram to, Discuss the relationship between the three short-run total cost curves.

Detailed explanation please and a clear diagram.

Answer 1

The three short-run total cost curves are:

1. AFC (Average Fixed Cost)

2. AVC (Average Variable Cost)

3. ATC (Average Total Cost)

Now, firstly the ATC cost remains fully reliable on both AVC and AFC. In the initial stage, AVC and AFC decline, as ATC depends upon both AFC and AVC, thus ATC also falls sharply.

The second scenario suggests that when AVC rises, but AFC remains at a falling point thus ATC also falls, as here the ATC contributes more than AVC.

Now, with an increase in output level, it increases the AVC on a large scale, which results in a hike in ATC. Therefore with this effect, there remains a U CURVED for ATC.

Diagrammatic Representation:

In the above-shown diagram, the curves are represented as short-run ATC and short-run MC. Now, when the short-run MC is below ATC, thus it decreases ATC and vise versa.

There occurs a break-even point where short-run MC is equal to ATC, thus here the ATC remains stable, i.e. neither rises nor decreases.