<< Chapter < Page Chapter >> Page >

Average total cost, average variable cost, marginal cost

The breakdown of total costs into fixed and variable costs can provide a basis for other insights as well. The first five columns of [link] duplicate the previous table, but the last three columns show average total costs, average variable costs, and marginal costs. These new measures analyze costs on a per-unit (rather than a total) basis and are reflected in the curves shown in [link] .

Cost curves at the clip joint

The graph shows marginal cost as an upward-sloping curve, and average variable cost and average total cost as U-shaped curves.
The information on total costs, fixed cost, and variable cost can also be presented on a per-unit basis. Average total cost (ATC) is calculated by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. Average variable cost (AVC) is calculated by dividing variable cost by the quantity produced. The average variable cost curve lies below the average total cost curve and is typically U-shaped or upward-sloping. Marginal cost (MC) is calculated by taking the change in total cost between two levels of output and dividing by the change in output. The marginal cost curve is upward-sloping.
Different types of costs
Labor Quantity Fixed Cost Variable Cost Total Cost Marginal Cost Average Total Cost Average Variable Cost
1 16 $160 $80 $240 $5.00 $15.00 $5.00
2 40 $160 $160 $320 $3.30 $8.00 $4.00
3 60 $160 $240 $400 $4.00 $6.60 $4.00
4 72 $160 $320 $480 $6.60 $6.60 $4.40
5 80 $160 $400 $560 $10.00 $7.00 $5.00
6 84 $160 $480 $640 $20.00 $7.60 $5.70

Average total cost (sometimes referred to simply as average cost) is total cost divided by the quantity of output. Since the total cost of producing 40 haircuts is $320, the average total cost for producing each of 40 haircuts is $320/40, or $8 per haircut. Average cost curves are typically U-shaped, as [link] shows. Average total cost starts off relatively high, because at low levels of output total costs are dominated by the fixed cost; mathematically, the denominator is so small that average total cost is large. Average total cost then declines, as the fixed costs are spread over an increasing quantity of output. In the average cost calculation, the rise in the numerator of total costs is relatively small compared to the rise in the denominator of quantity produced. But as output expands still further, the average cost begins to rise. At the right side of the average cost curve, total costs begin rising more rapidly as diminishing returns kick in.

Average variable cost obtained when variable cost is divided by quantity of output. For example, the variable cost of producing 80 haircuts is $400, so the average variable cost is $400/80, or $5 per haircut. Note that at any level of output, the average variable cost curve will always lie below the curve for average total cost, as shown in [link] . The reason is that average total cost includes average variable cost and average fixed cost. Thus, for Q = 80 haircuts, the average total cost is $8 per haircut, while the average variable cost is $5 per haircut. However, as output grows, fixed costs become relatively less important (since they do not rise with output), so average variable cost sneaks closer to average cost.

Questions & Answers

what the word federal mean
Kabba Reply
Meaning of "movement along curve?
Lizabeth Reply
There is movement along curve whenever the 'price' is affected
its mean price is positively response as demand change and price is negatively reaponse as supply changes
its mean when quantity demanded of commodity changes due to a change in its price ,keeping other factors constant, it is know as change in quantity demanded.
pleas wat the formula when calculating for equilibrium point
when there is increase in the price
when there is increase in demand, demand will decrease.
A movement along curve is a movement on the curve mainly caused by a change occured in both quantity demand and quantity supplied.
what is demand
Dennis Reply
unwilling to buy good quality at a particular price and a particular time
Demand is the willingness and ability to buy goods and services at different prices at a given time.
is production function different from psychological law of consumption?
Kshirodra Reply
why supply is not the same quantity supplied
emmanuel Reply
What is Elasticity?
I don't even understand
what is damand
Elasticity is an economic concept used to measure the change in the aggregate quantity demand for a goods or service in relation to price movements of that goods and service.
Demand is an economic principal referring of a consumers desire to purchase goods and service and willingness to pay a price for a specific goods or service.
supply is not the same as quantity supplied, because when economic refer to supply, they mean the relationship between a range of price an the quantity supplied those price -are relationship that can be illustrated with a supply curve or supply schedule
Is a science which study human behavior as a relationship between ends and scares means which have alternative uses
I dont think so
It is Economic growth and stability
How Economic recovery growth Planning
Mahmood Reply
Expatiate your question
Are bonds the same as liabilities?
Anderson Reply
Demend create it own supply how?
what is way ofrece thinking
what is the Economic way thinkig?
what is gasoline
Deepak Reply
how to know which products demand
in other words economic can be define as what?
Ojarigho Reply
what is the difference between economics activities and economics system
Joshua Reply
what is the difference between price elasticity of demand and income elasticity of demand
Ellen Reply
what is demand
Alpha Reply
What is demand
is a measure of responsiveness at which a consumer is willing and able to offer a particular product at a given period of time
what is consumer
chill Reply
what is economics?
Odei Reply

Get the best Principles of economics course in your pocket!

Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?