Introduction
- Fixed costs (FC) will remain the same regardless of the quantity of output produced such as rent.
- On the other hand, variable costs (VC) vary with the quantity produced such as salaries.
- Total cost (TC) = FC + VC
Average Fixed Cost, Average Variable Cost, and Average Total Cost
- Average Fixed Cost (AFC) = FC / Q
- Average Variable Cost (AVC) = AVC / Q
- Average Total Cost (ATC) = TC / Q = AFC + AVC
Exercise
Exercise on Calculating costsCheck your answers here:
Solution to the Exercise on Calculating costsWhy ATC Is Usually U-Shaped
| As Q increases: in the beginning, AFC decreases which pulls down ATC. Then as Q keeps increasing, AVC rises as well as ATC. Hence, to be efficient, we need to find Q that minimizes ATC. |  |
ATC and MC
| When MC < ATC, ATC decreases. But when MC > ATC, ATC rises. The MC curve crosses the ATC curve at the ATC curve's minimum. |  |