Topics: Microeconomics | Theory of the Firm | Cost Curves
Level: JC H2 Economics / IB Economics HL
Struggling to remember which cost curve shifts when?
Confused between MC=MR and P=MC
In our Economics tuition classes, we use mnemonics and songs to make these technical rules stick. This short song covers the essential rules for drawing Cost Curves and identifying Profit Maximization points.
Listen to the track below with the accompanying notes below:
1. Fixed vs. Variable Costs (0:08 – 0:31)
Lyric: “Fixed costs do not vary with output level… Variable costs vary with output level.”
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Fixed Costs (TFC): Costs that must be paid even if output is zero (e.g., Rent, Machine setup).
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Graph: A horizontal line.
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Variable Costs (TVC): Costs that increase directly as production increases (e.g., Raw materials, Labor).
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Graph: Upward sloping, starting from the origin.
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2. The “Shifting” Rules (0:39 – 0:47)
Lyric: “Average and marginal change with variable… Only average cost changes if fixed costs change.”
This is a common exam trap. You must know which curve shifts when costs change.
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Scenario A: Rise in Variable Costs (e.g., Wages rise)
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Both Average Cost (AC) and Marginal Cost (MC) shift UP.
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Scenario B: Rise in Fixed Costs (e.g., Rent rises)
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Only Average Cost (AC) shifts UP.
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Marginal Cost (MC) remains UNCHANGED.
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Why? Marginal Cost is the cost of producing one extra unit. Since rent is fixed, producing one extra unit doesn’t change the rent, so MC is unaffected.
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3. The Golden Rule: Profit Maximization (0:54 – 1:08)
Lyric: “MC = MR: Profit Max Condition… Do not confuse with P = MC.”
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Profit Maximization: Always occurs where Marginal Cost = Marginal Revenue (MC=MR). This determines the quantity (Qty) the firm should produce.
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Allocative Efficiency: Occurs where Price = Marginal Cost (P=MC).
4. Calculating Profit (1:08 – 1:25)
Lyric: “Profit = TR – TC… Use AR and AC to show profits.”
To shade the profit area on a diagram, you don’t look at “Total” curves. You look at the “Average” curves at the equilibrium quantity.
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Total Revenue (TR) = $P x Q (Area under AR).
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Total Cost (TC) = $AC x Q (Area under AC).
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Profit Area: The rectangle between Average Revenue (AR) and Average Cost (AC).
5. Long Run Economies of Scale (1:25 – 1:32)
Lyric: “Only use LRAC to show EOS… LRAC can also show tech advancement.”
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Short Run (SRAC): Reflects diminishing marginal returns.
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Long Run (LRAC): Used to show Economies of Scale (EOS).
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Movement along LRAC: Internal EOS (firm grows larger).
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Shift of LRAC: External EOS or Technological Advancement.
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Can’t get the tune out of your head?
That’s the point! We have a whole library of Economics Songs that cover Elasticity, Market Failure, and Macroeconomics.
Join our JC Economics Tuition A-Level or IB Economics Tuition classes to get access to the full playlist and make revision fun (and effective).
(For more info on Theory of the Firm, use our Firms and Decisions Notes. For other topics, browse through our library of Free Economics Notes.)