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Fixed cost
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Costs that do not vary with the quantity of output produced
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Examples of fixed cost
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Rent, equipment, capital-related expenses, essential workers' salaries
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Variable costs
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costs that vary with the quantity of output produced
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Examples of variable cost
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Supplies, hire more workers
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Total cost
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FC + VC (sum of fixed cost and variable cost)
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Average Total Cost (ATC)
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TC/Q (total cost divided by quantity of output produced)
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Average Total Cost (ATC)
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AVC + AFC (sum of average variable cost and average total cost)
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Average Fixed Cost (AFC)
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FC/Q (fixed cost divided by quantity of output produced)
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Average Variable Cost (AVC)
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VC/Q (variable cost divided by quantity of output produced)
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Marginal Cost (MC)
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Change TC/ Change Q (change in total cost divided by change in quantity produced)
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How much it costs to make one unit
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Average Total Cost (ATC). TC/Q.
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How much it costs to increase production by one unit
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Marginal Cost (MC)
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Marginal Cost Curve
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Change in TC/Change in Quantity. How much the additional unit of output costs to produce.
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Principle of Diminishing Marginal Product
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Efficiency decreases as you produce more product
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Average Total Cost (ATC) Curve
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U-shaped (ATC)
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Average Fixed Cost (AFC) Curve
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Constantly decreases
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When do the Marginal Cost Curve and the Average Total Cost Curves intersect?
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the minimum of the average total cost curve
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Efficient scale
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the quantity of output that minimizes average total cost, bottom of the u-shaped average total cost curve
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Average Variable Cost Curve
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U-shaped (AVC). TVC/Q. How much variable cost is in each unit of output.
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Fixed Costs in the Long Run
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Variable
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Economies of Scale
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Costs are declining as you increase your business; long run ATC decreases as output increases; ATC in the short run of a small factory; specialization of workers/labor
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Constant returns to scale
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Most well-run businesses are here; long run ATC does not vary with level of output; ATC in the short run of a medium sized factory
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Diseconomies of scale
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As output increases, ATC increases; (NOT GOOD); difficulties in management; ATC in the short run of a large factory; companies become too big for their own good, and have troubles communicating/specializing; coordination problems and management stretched
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