Total Cost (TC): the cost from all factors of production. The total cost is separated into two types of costs: total fixed cost, and total variable cost.
Total Fixed Cost (TFC): the costs that are independent of output. Examples would be rent, buildings, machinery.
Total Variable Cost (TVC): the costs that are dependent of output. Examples would be labor, wages, utilities.
TC = TFC + TVC
Marginal Cost & Average Cost
Marginal Cost: the increase in total cost from a one-unit increase in output
Marginal cost is calculated by
Marginal cost =
Average cost is separated into 3 types.
Average Fixed Cost (AFC): the total fixed cost per unit of output.
Average Variable Cost (AVC): the total variable cost per unit of output.
Average Total Cost (AVC): the total cost per unit of output.
ATC = = AFC + AVC
The U-shape from the ATC, AFC, and AVC curve is because of the following two influences:
Shifts in Cost Curves
- Spreading total fixed cost over a larger output
- Increase returns initially, and then diminishing returns afterwards
There are two factors can that can change the short-run cost curve:
- Prices of factors of production
Technology: Technological advances lowers the cost of production and shifts the TC curve downward. In addition, it shifts the TFC curve up, and shifts the TVC curve down.
TC , TFC , and TVC
Example: Advances to robot population shifts the TC curve downward. Since robots is considered a capital (Fixed factor), then the TFC shifts upward. Since less labor (variable factor) is used due to the robots, then the TVC shifts downward.
Prices of Factors of Production: An increase in prices of factor of production increases the cost, therefore shifting the TC curve up. However, other curves shift depending on the situation.
Case 1: An increase in rent (fixed factor) shifts the TFC and AFC curves upward, but leaves AVC, TVC, and MC curve unchanged.
TC , TFC , AFC , but TVC, AVC, MC unchange
Case 2: An increase in wages (variable factor) shifts the TVC, AVC, and MC curve upward, but leaves TFC and AFC curves unchanged.
TC , TVC , AVC , MC but TFC, AFC, MC unchange