Question

If you run a small courier company as the subcontractor for Australia post, use the cost curves to illustrate which component of your costs will be affected by the petrol price drop.

•Identify the type of cost petrol is for the company (variable/fixed cost), and explain the impact of price change on this cost category and total and average cost.

•Draw initial cost curves (ATC, AVC, AFC and MC).

•Show the change of those curves as a result of the petrol price change, and explain in the text..  

Answer 1

Petrol is a variable cost for the company as it changes in the short-run.

Variable costs are such costs for a firm that change with change in output of the firm. In other words such costs change in the short run, generally within an year, for e.g., labor costs, electricity costs, etc. whereas all such costs which can not be changed in the short run, generally within an year, are called fixed costs, for e.g., rent, machinery and equipment cost etc.

As we can see in the diagram above, due to an increase in the price of petrol, the variable cost has increased by t, from p₀ to p₁.

With increase in variable cost, the quantity supplied has decreased from q₀ to q₁.