Once again from the headquarters of the
McNeil International Film Studios we're going to 
talk about how to read graphs.
So we have here this
U-shaped graph, what can it be,
disinterested econ student?
Uh well, yes
I'm sure you said average cost.
What's this other one, this lower U-shaped one?  
[Voice:  mumble, mumble, mumble]  Yea,
right, average variable cost.
I'm trying to make this as life-like as I can.  And this curve right here
that catches each of them at their bottom,
that one, and
when the average is decreasing
when the average is decreasing this curve is below it, wen the average is 
increasing this curve is above it and when
the average is neither increasing or
decreasing
they are equal.  What is this?  Which graph is it?
[Mumbling voice: I don't know] -marginal cost, of course.
Now, what about this one?
What's on the axis? Dollars here, and on the horizontal axis?
Quality produced.  What's this graph? Wuh.
Like that.  It starts at the origin and has that squiggly shape.
What do we call the graph? I believe it's
total variable cost.  How do you know its total variable cost?  Because it starts at the origin.
Why does it have that squiggly shape?  Because of the law of....?  diminishing returns.  Good job.
(I know you were about to mumble it.)  And now this one, can I do it?  Not
very well.  This one is total cost.  How do you  know it's total cost? 
Because it starts above zero here.
So  what would be total fixed cost here?
The answer is whatever is this value, because
when there is zero units produced and there are costs, those have to be fixed costs. 
They cannot be variable costs.  And could we draw the total
fixed cost?  Yes, they are horizontal at whatever the level of fixed costs is.
And on the horizontal axis we have? Quantity produced and on the
vertical axis we have?  Oh, excuse me.  Dollars.
[Voice:  you have a parrot.]
(Parrot?)  OK, now, see this?
Bumpedy, bumpedy, bumpedy, bump.  15 units, there is a point, there is a point, and
there is a point.  Now when you think of these of these graphs, they are NOT lines.
They are collections of points and
each point represents a combination of
numbers that associates whatever is on
the horizontal axis -
quality produced, to whatever's on the
real axis - dollars.
So in this case it says:  if you produce
15 units, 
your average variable cost will be about
$15.
That's average variable cost when you
produce 15 units.  If you produce different
quantity,
then you would get a different cost figure.   OK, as we go up,
there.  That point says that 
if you produce 15 units then your
average total cost will be
$20 a unit.
And this one says, ooo, look at that -
$35.  What does that mean?  That says
the 15th unit cost
$35.  $35 was the cost of your decision
to produce the
15th unit specifically.  This cost, $20, is the average cost of
producing each the 15 units - some cost
more, some cost less, but the average was
$20.
Now, do you know what is the average
fixed cost.
Yes, because average cost equals average fixed cost plus
average variable cost so you know the
average cost is $20 and the average
variable cost
is $15 then the average fixed cost must be 
$5 and it turns out by some
amazing accident here that this gap between
these two points is $5.  So this $5 represents 
average fixed cost when you produce 15 units. 
Now, let's go over to this graph. This is the same quantity
axis and we'll find 15 here.  There's 15
Perfect.  Now let's go up - oh, look at that, look at that, and look at that.
What does this curve tell you?  This point on this
total variable cost curve says if you produce
15 units, your total variable costs will be
that amount and your total cost will be
that amount and the difference between the two will be
your total fixed cost because total cost equals total
fixed cost plus total variable cost.
Good, take a breath.  [Voice: breathing sound.]
 Now, if you produce 15 units  
and each issues is costing you $20 on average
The average cost of producing  15 units
is total cost of producing 15 units
divided by the quantity which you know
to be 15.
It turns out that you have two these numbers, two out of the three.
The quantity is $15, the average cost of
producing
each of these 15 units is $20, so can you use this information to find
out
what is total cost?  The answer is yes.
Total cost
is 15 units times $20 each unit on average -
that's $300.  Now what is the size this rectangle right here?
The answer is it's $20 high and 15 units wide.
 
This represents total cost.  The total cost is...
$300.
So this point on the total cost curve says that when you produce 15 units,
the total cost will be $300.  What does this point tell you?
It says that when you produce 15 units
your average variable cost is going to
be $15.
So this area, this rectangle here is  15 units wide by
15 units high and that represents the
total
variable cost of producing 15 units and
that number, $15 times 15 
will be that amount.  I'm not quick enough
figure out what is $15 times 15.  Do you know, student there?
15 times 15.  [Voice:  uhhhh]  
Well anyway,
the difference between the two will be the total fixed
cost.  The last beautiful one is this:
if you know that the marginal cost of the  
 15th unit is $35 dollars here,
then can you tell me what is the total cost when you produce 14 units?
The answer is?
You want to think about it for a second?  The answer is 
$265
this one - $265.
How do I know?  Because
your total cost went up by thirty-five dollars when you produced the
15th unit which means the 14th unit had to have cost you $35 less than this one.
Anyway this is just a little exercise in
how to read these graphs and that
they're all connected
and it is, in some very twisted way, 
beautiful.  Bye.
