For instance if TC = Q3 – 18Q2 + 91Q + 12. the fixed cost here is 12. That means, if Q is zero, the Total cost will be 12, hence fixed cost.
It could be observed that TFC does not change with output. Even when the output is zero, the fixed cost is Rs1000. TFC is a horizontal straight line, parallel to X axis.
Total Variable Cost (TVC): All payments to the variable factors of production is called as Total Variable Cost. Hypothetical TVC is shown in the below table and diagram.
In the diagram the TVC is zero when nothing is produced. As output increases TVC also increases. TVC curve slopes upward from left to right.
For instance in TC = Q3 – 18 Q2 + 91Q + 12,
variable cost, TVC = Q3 – 18Q2 + 91Q
Total Cost Curves: Total Cost means the sum total of all payments made in the production. It is also called as Total Cost of Production. Total cost is the summation of Total Fixed Cost (TFC) and Total Variable Cost (TVC). It is written symbolically as
TC = TFC + TVC. For example, when the total fixed cost is Rs1000 and the total variable cost is Rs200 then the Total cost is = Rs1200 (Rs1000 + Rs200).
If TFC = 12 and
TVC = Q3 – 18Q2 + 91Q
TC = 12 + Q3 – 18Q + 91Q
Average Fixed Cost (AFC): Average Fixed Cost refers to the fixed cost per unit of output. It is obtained by dividing the total fixed cost by the quantity of output. AFC = TFC / Q where, AFC denotes average fixed cost, TFC denotes total fixed cost and Q denotes quantity of output.
For example, if TFC is 1000 and the quantity of output is 10, the AFC is Rs100, obtained by dividing Rs 1000 by 10. TVC is shown in below table and diagram?
It is to be noted that-
1. AFC declines as output increases, as fixed cost remains constant.
2. AFC curve is a downward sloping throughout its length, never touching X and Y axis. It is asymptotic to both the axes.
3. The shape of the AFC curve is a rectangular hyperbola.
Average Variable Cost (AVC): Average Variable Cost refers to the total variable cost per unit of output. It is obtained by dividing total variable cost (TVC) by the quantity of output (Q). AVC = TVC / Q where, AVC denotes Average Variable cost, TVC denotes total variable cost and Q denotes quantity of output.
For example, When the TVC is Rs 300 and the quantity produced is 2, the AVC is Rs150, (AVC = 300/2 = 150) AVC is shown in the below table and diagram.
Average Total Cost (ATC) or Average Cost (AC): Average Total Cost refers to the total cost per unit of output.
It can be obtained in two ways.
1. By dividing the firm’s total cost (TC) by the quantity of output (Q). ATC = TC / Q.
For example, if TC is Rs1600 and quantity of output is Q = 4, the Average Total Cost is Rs 400.
(ATC = 1600/4 = 400)
If ATC is Q3 – 18Q2 + 91Q + 12, then AC = Q2 – 18Q + 91 + 12/Q
2. By ATC is derived by adding together Average Fixed Cost (AFC) and Average Variable Cost (AVC) at each level of output. ATC = AFC + AVC. For example, when Q = 2, TFC = 1000, TVC = 300; AFC = 500; AVC = 150; ATC = 650. ATC or AC is shown in the below table and diagram.
Marginal Cost (MC): Marginal Cost is the cost of the last single unit produced. It is defined as the change in total costs resulting from producing one extra unit of output. In other words, it is the addition made to the total cost by producing one extra unit of output.
Marginal cost is important for deciding whether any additional output can be produced or not. MC = ∆TC/∆Q where MC denotes Marginal Cost, ∆TC denotes change in total cost and ∆Q denotes change in total quantity.
For example, a firm produces 4 units of output and the Total cost is Rs 1600. When the firm produces one more unit (4 + 1 = 5 units) of output at the total cost of Rs 1900, the marginal cost is Rs 300.
MC = 1900 – 1600 = Rs 300
