** What are the Relationships Between the Various Costs?**

Section 3 provides definitions of the important economic costs. Below is a list of the relationships between these costs. Using the abbreviations from the previous section, and using Q as the number of goods or services produced, we have

1. TVC + TFC = TC

2. AVC = TVC/Q

3. AFC = TFC/Q

4. ATC = TC/Q

5. MC = change in TC/change in Q

**Examples*** *

**Example 1**

Problem: Let’s suppose that fixed costs are $300 and variable costs are $900. What is total cost?

Solution: Total cost = $300 + $900 = $1,200

**Example 2**

Problem: Let’s suppose that you produce 50 bushels of apples, and you use the costs from Example 1. What are average variable costs and average fixed costs?

Solution: AVC = $900/50 = $18, and AFC = $300/50 = $6

**Example 3**

Problem: In the above example, what is average total cost?

Solution: ATC = $1,200/50 = $24

** Example 4
** Problem: If you increase your production by 5 bushels, and your total cost increases by $60, what is your marginal cost?

Solution : MC = $60/5 = $12

**Example 5**

Problem: In the following table, a firm has a choice of producing from zero to 4 products. We know some of the costs. Can you calculate the missing values?

Q |
TC |
TFC |
TVC |
ATC |
AFC |
AVC |
MC |

0 | 80 | ||||||

1 | 80 | ||||||

2 | 110 | ||||||

3 | 70 | ||||||

4 | 90 |

The following table is a copy of the above table with the missing values filled in. The dashes indicate that the values cannot be calculated (undefined) because the quantity is zero.

Solution:

Q |
TC |
TFC |
TVC |
ATC |
AFC |
AVC |
MC |

0 | 80 | 80 | 0 | – | – | – | – |

1 | 160 | 80 | 80 | 160 | 80 | 80 | 80 |

2 | 220 | 80 | 140 | 110 | 40 | 70 | 60 |

3 | 290 | 80 | 210 | 96.7 | 26.7 | 70 | 70 |

4 | 380 | 80 | 300 | 95 | 20 | 75 | 90 |

**Video Explanation**

For a video explanation of cost calculations, please watch: