Extensive microecon review

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Definition, Shape of the AVC, ATC and MC Curves in the Short Run: Law of Diminishing Returns
â?¢ Long run Cost Curves

The AVC (average variable cost) curve is a U shape, demonstrating that costs generally decline up to certain level of production, and then tend to rise (law of diminishing ruterns sets in when AVC curve begins to slope upward).
The ATC (average totals cost) curve is also U-shapes, but is above the AVC curve.
The MC (marginal cost) curve is more steeping sloping, and crosses the AVC curve at its lowest point. It demonstrates the cost of the next unit produced.

â?¢ Shape of the curves: Economies & Diseconomies of Scale
Economy of scale occurs when the average cost of production falls as output increases. The ATC curve slopes downward. Diseconomies of scale are the opposite: costs rise as production increase, causing the ATC curve to slope upward.

â?¢ Different Plant Sizes & Structure of Industry
Monopolies tend to have a few large plants. In oligopoly, we will see more plants of smaller size. In perfect competition we would see many small plants, reflecting the law of diminishing marginal returns. After a certain point, costs begin to rise, which causes the industry to fracture into many small firms. In monopoly and oligopoly, we will not see diminishing marginal returns at low levels of output.

â?¢ Different Market Structures: Perfect Competitive firm & Perfectly Competitive Industry: Shape of their demand curves
In perfect competition, firms face an infinitely elastic demand cive. The demand curve is a flat, horizontal line. ANy change in price will result in a complete absence of demand.

â?¢ Firm: Price taker, Only Decision is to decide: How much to Produce
In perfect competition firms cannot choose their prices. Another firm would take all their business if they raised prices, and the market settles at the lowest price that enables the firms to stay in business. So, they only need to decide how much to ...