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: