← Market structures and marginal analysis
Cost and demand shocks: shifting the right curve
Every paper shifts one or more curves and asks you to trace the consequence — knowing WHICH curve a given change shifts is most of the mark.| Change | Curve affected | Direction |
|---|---|---|
| A rise in a FIXED cost (rent, insurance, loan interest) | Average cost (AC) shifts up | MC is unaffected — fixed costs do not change with output |
| A rise in a VARIABLE cost (fuel, materials, freight) | Both MC and AC shift up | The extra cost applies to every unit produced |
| A rise in demand | AR/D (and MR, for a price maker) shifts right/up | More is demanded at every price |
| A fall in demand | AR/D (and MR) shifts left/down | Less is demanded at every price |
The fixed-vs-variable distinction is examined as its own standalone mark almost every year — a fixed cost change never moves MC, only AC.
Exam-style Why a fixed-cost rise does not change the profit-maximising output A firm's insurance premium (a fixed cost) rises. Explain the effect on its short-run profit-maximising output. A fixed cost does not vary with output, so it never appears in the MC curve — MC is unchanged. The profit-maximising rule is MR = MC, and since MC has not shifted, the profit-maximising quantity does not change either. What DOES change is AC (average cost includes the fixed cost, spread over output), so the firm's profit falls — potentially from supernormal to subnormal — without any change in output or price. ✓ Output stays the same; only the level and TYPE of profit changes. This is exactly the reasoning tested in the 2022 and 2025 fixed-cost questions. ✕Assuming any cost rise shifts MC
A rise in a FIXED cost only shifts AC, never MC — the profit-maximising output is unchanged. Only a rise in a VARIABLE cost shifts MC (and therefore the profit-maximising quantity). Confusing the two is one of the most consistently tested traps in this standard.A fast check when a cost or demand shock appears
- Have I identified whether the change is fixed, variable, or a demand shift, before drawing anything?
- Have I checked whether the profit-maximising quantity actually changes, or just the level of profit?