Section 4: Cost Calculations

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?

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

Solution:

Video Explanation
For a video explanation of cost calculations, please watch: