Description 
The narrator discusses the relationship
between production and cost. In 
particular, the narrator explains total 
fixed cost, total variable cost, total 
cost, marginal costs, average fixed cost,
average variable cost, and average total
cost.
 

Audio Transcript 

Marge: Things are getting’ way too crazy in here.  These new workers are just getting’ in the way, and my profits are drying up.

Narrator: Marge does not yet fully understand the relationship between production and cost. She has hired lots of workers in her effort to make more burgers and now she’s faced with a large payroll and diminishing productivity.

Narrator: Let’s examine the costs associated with employing that labor.  Labor is a short term variable cost that changes as Marge hires and fires workers. 

Narrator: In a competitive market such as the one in Pleasantvile, Marge can hire as many workers as she needs at the market wage.

Narrator: We can convert these quantity of labor figures into costs by assuming that the market wage is $50 per day.

Narrator: The numbers along the x axis now represent the cost of labor.  For the purpose of a clear illustration, let’s flip the graph around, swapping the x and y axes.  The result is a curve representing Marge’s total variable cost: in other words, her cost of labor at each level of output.

Narrator: The curve shows that total variable cost rises relatively slowly at first, when there are fewer workers, working conditions are good, and productivity is high.  In other words, when marginal product is increasing, total variable cost rises slowly. 

Narrator: At higher levels of production, the curve rises sharply because each new addition to the payroll adds less and less to the total output due to diminishing marginal productivity. 

Narrator: Now let’s examine her fixed costs.  The costs associated with her building are independent of output.  She incurs these costs even if nothing is produced.  Because these costs are fixed and do not change at different levels of output, the total fixed cost curve is flat.

Narrator: Total cost is simply total fixed cost plus total variable cost.  Because Marge’s goal is to maximize profit, she must produce with maximum efficiency. She would like to know how increases in production affect her total costs. 

Narrator: In economic terms she needs to understand her marginal cost.  Marginal cost is the change in total cost resulting from a one-unit change in output.  

Narrator: The curve shows that marginal cost decrease at first due to increasing marginal productivity then rises due to increasing marginal productivity when each new worker adds less and less to total output.

Marge: Phew, enough about costs already, you’re wearing me out!

Narrator: Hold on, Marge!  In addition to knowing your total cost and marginal cost, you would do well to examine your average cost figures, which are total cost figures divided by the number of units of output.

Narrator: In the short term, average fixed cost is total fixed cost divided by the number of units produced.

Narrator: The curve for average fixed cost clearly shows that as production increases, the average fixed cost decreases.   

Narrator: The average variable cost is total variable cost divided by the number of units produced. 

Narrator: The average variable cost curve is U-shaped. In this case, it falls to a minimum at around 250 burgers per day and then rises. 

Narrator: Average total cost is derived in the same manner by dividing total cost by the number of units produced. The average total cost curve is also U-shaped, falling to a minimum at around 300 burgers per day then rising.

Narrator: When we overlay the marginal cost curve, we see that it intersects the average total cost and average variable cost curves at their minimum points. Both of these curves are downward-sloping when marginal cost is below them and upward-sloping when marginal cost is above them.

Marge: Tell me. What is the average total cost of a two-week vacation these days?

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