Question

Costs are very important not only to us as individual consumers, but also to businesses who must control costs in make the desired profit. We should have learned that in this chapter (if we did not already know that). In this discussion answer the following questions (and support your answer(s)): What can cause a firm's cost curves to shift up or down? How would a shift of the cost curves affect a firm's profits? Please answer this question in extreme detail (about three paragraphs if possible). The class is specifically Microeconomics. Thank you!

Answer 1

The cost is the direct expenses of manufacturing the product includes the direct labour and materials.Lowering the cost would increase the profit for the businessmen and intern lower the price of the product.Prices decisions mainly depends on cost .Similarly customer expect to pay a certain price for merchandise .Pricing above expected price will results in lost sales. Cost curves shifts upwards and downwards in response to a) Technology : A technological change that increase productivity shifts the product curve upward and cost curve downward .On the other hand tech changes which results in the firm using more capital results in increasing AFC and hence TC curve move upward.

2) Prices of the factors of production: When factor of production cost increases the,total cost moves upward and decrease in total cost is the result with downward movement .If the price that a firm charges is higher than its average Cost of production for that quantity produced then the firm will earn profit and conversly if price is lower firm will incurred loss.The profit that is affected due to shift in the cost curve can be explained as if the price received by the firm causes it to produce at a quantity where price is equal to AC than the firm will earn zero profit.Similarly a price below AC curve will results in loss and a price above AC curve will results in profits. Here it is very important to understand the relationship of various cost curves ,such as AC,MC,AVC,AFC,TC,TVC,TFC. As because of technological advantage or economies of scale AFC which is average fixed cost declines but never reaches zero.The AVC curve first decline and reaches its minimum point this results in increasing profits and thereafter AVC rises at its minimum it is equal to MC hence AC first decline reaches its minimum because AC =AFC+ AVC .There is a direct relationship between AC and MC curves both the AC curves and MC curves are U shaped when AC curve falls MC is less than AC this results because decrease in MC is due to fall of one additional unit but AC is spread to a no. of units MC reaches its minimum earlier and AC still declining at minimum MC=AC and MC cuts AC from below if we take the distance of it from MR curve we get a super profit zero profit is when MR (price)=AC and loss when AC,>PRICE (MR)