cost curve perfect competition shift up and left

Understanding the Cost Curve Shift under Perfect Competition: An Overview

In perfect competition, a firm's average total cost curve is influenced by various factors, including its average fixed costs. When the average fixed cost increases for any given quantity, the average total cost also rises accordingly. This change in average fixed cost has a ripple effect on the other curves that embed fixed costs within them.

Average Total Cost: A Combination of Average Variable and Fixed Costs

The average total cost is a combination of the average variable cost and average fixed cost. When the average fixed cost shifts up, as depicted in the diagram, it leads to an increase in the average total cost for that quantity. The change in average fixed cost has a visual impact on the curves, making them shift upwards.

Impact of Changes in Productivity or Cost

What happens when there are changes in productivity or cost? Well, if a firm experiences a decrease in its fixed costs over time, it will lead to a convergence of its average total cost and average variable cost. As the average fixed cost approaches zero, the difference between these two curves becomes minimal.

The Turning Point: Where Average Total Cost Meets Average Variable Cost

As the average total cost and average variable cost converge, they intersect at a specific point. At this point, the average total cost starts trending upwards, while the average variable cost begins to trend downwards. This turning point marks the beginning of a new phase in the firm's cost structure.

Marginal Cost Curve: A Symptom of Decreasing Average Fixed Costs

The marginal cost curve is another important concept in perfect competition. As the average fixed costs decrease over time, the marginal cost curve asymptotes towards zero as more units are produced. This is because the fixed costs become less significant as the quantity increases.

To recap, changes in average fixed costs have a direct impact on the firm's average total cost curve under perfect competition. The curves shift upwards when average fixed costs increase, leading to an upward trend in average total cost. As productivity or cost improvements occur over time, the difference between average total cost and average variable cost decreases, ultimately converging towards zero.

Cost curve perfect competition shift up and left