<< 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 is implicit cost
fuseini Reply
The links don't seem to be working
Scorch Reply
what is taxonomy
wise Reply
how to interprets elasticity
Joseph Reply
what is demand curve
Joseph
It is the graphical representation of quantity demand of a commodity?
Kofi
it is the graphical representation of price and quantity demanded of a commodity
Obaa
what is the difference between positive economics and normative economics.
pauline Reply
It said that positive economics studies the facts, but normative one focus on ought to be.
Mohammad
in another words normative economics focuses on what the fair situation is.
Mohammad
positive economics: wages are 10$ per hour. normative economics: wages should be 25$ per hour.
Mohammad
what is choice
Hamis Reply
what is indifference curve
Misba Reply
It is an alternative combination of consumption of two goods which gives equal level of satisfaction.
Shujjat
good morning guys.. I am Lawrence from Nigeria.. trust am welcome here..
Lawrence Reply
Lovely morning bro... Welcome 💕
Kosiso
ur most welcome lawrence
Kun
Welcome back to another session,happy Friday morning
Dumbuya
good morning guys I'm Oumar Kromah from Côte d'ivoire am I welcome here
Oumar
lovely morning bro welcome
Malak
i dont understand on economics
Noor
i m from pakistan
Noor
mashallah
Tanveer
I am from Nepal
OP
i m Pakistan
Malak
Am Gabriel from Ghana
Kwame
hmmm
Noor
are you ecnomist?
Noor
Am Eben Paak from Ghana
Eben
Okay.. Nice meeting us
Kosiso
l am James Borbor from Liberia
jackie
I am a researcher
jackie
you all are ecnomost
Noor
ohh nice
Noor
re search on economy
Noor
what is demand
Milton Reply
yes
Malak
Link seems to not work
Jayden Reply
what is an opportunity cost?
Azotikemah Reply
next best alternative cost...
suresh
Meaning of Economics
Kamara Reply
It can be define as the practical science that studies human relationship between End's and scare means which have alternative uses in all aspect of human life
Kosiso
what's the meaning of pure and impure
Levinel
Pure is free from immoral behavior or quality,Impure not clean dirty,filthy containing something that is in pure
Dumbuya
what is economics
Malak Reply
Economics is a social science which deals with humans behavior
Dumbuya
Explain two reasons why trade union membership may decline in a country
Pop Reply
analyse the factors that influence the strength of a trade union.
Pop
discuss whether or not trade unions benefit workers
Pop
nice questions guys
Kun
Firstly, to what extent is it willing to backup an employee or worker Secondly , is it effective in sustaining a valid point
Scorch
what is demand
ALALE Reply
what's the difference between elastic and inelastic
ALALE
The desire to purchase goods and services at a particular price
Dumbuya
Elastic: demand is price sensitive. Inelastic: demand is not price sensitive.
Ernest

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?

Ask