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
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
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
Problem: In the above example, what is average total cost?
Solution: ATC = $1,200/50 = $24
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
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?
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.
For a video explanation of cost calculations, please watch: