Our eventual aim of this learning session is to understand (and know ‘like the backs of our hands’) the following diagram:

Cost Curves Graph

First we need to understand the difference between fixed and variable costs. This video by MJM Foodie handles this well:

This is a very good interactive exercise to consolidate your understanding of the different types of cost, and ends with a graph to show how their ‘curves’ will look. It introduces the idea of marginal costs and links changes in these costs to the theory of diminishing returns – crucial to understanding the shapes of the graphs. Read all of the text and work through the activities from start to end.


Now MJM Foodie begins to link us to the graphs more directly:

If you need another glimpse of how the product curve ‘translates’ to the cost curve so that the theory of diminishing marginal returns is transferred, see the first few slides of the following (after slide 3 , the slideshow really gets too technical for IB Economics):


We need to understand and be able to draw the TC, FC and AC curves.

This link helps us understand how to achieve the graph at the top – work your way through these explanations very carefully:

image http://www.reffonomics.com/TRB/chapter8/COSTS6.swf

This next link gives a useful summary of the different cost curves, and includes an interactive exercise to check your understanding on Average Total Costs


This is very useful for understanding the shapes of each of the cost curves:

Cost Curves Part 2 from reffonomics

Activity 7 here is a very good practical exploration of products and costs using both the EXCEL sheet and the Word Document:


Finally this interactive graph allows you to ‘play’ with the set of cost curves we see in the first image of this post, showing how labour prices and fixed costs can be altered to change the gradients of the graphs, but notice how their overall shapes remain:


Back to MJM Foodie. She explains how we can link from TC, FC and AC to ATC, AFC and AVC curves:

Finally, some more videos (if you need them) to reinforce what you should have learned by now:

Cost Curves for Firms by pajholden