Finance and the Economy · Seminar 4 · Cost-volume-profit analysis

Average and marginal cost at Lia’s Coffee Bar

Fixed cost is £3.00 and variable cost rises with every extra cup. Change the fixed cost and watch AFC, AVC, ATC and MC move; the marginal cost curve always cuts average total cost at its lowest point, the efficient scale. Question 1, from Business Economics (Mankiw, Taylor & Ashwin, ch. 9).

Pick a view, or change the fixed cost. The dot marks the lowest average total cost; the table below is part (a) completed.
lowhigh

Lowest ATC

Efficient scale

MC crosses ATC at

Reading

QFCVCTCAFCAVCATCMC

Why it matters. The efficient scale is where resources are used most efficiently and cost per cup is lowest. A higher fixed cost (a dearer lease, say) pushes the whole ATC curve up and the efficient scale to the right, because more cups are needed to spread the fixed cost.

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