Fixed and Variable Costs

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 costs

Check your answers here: Solution to the Exercise on Calculating costs

Why 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.

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Date of last modification: 2019