3.3 Short-run Production Costs

Fixed vs. Variable Costs

Total Fixed Cost (TFC) doesn't change with output (rent, insurance); it exists even at zero output. Total Variable Cost (TVC) changes as output changes (labor, materials). Total Cost (TC) = TFC + TVC. As output rises, TVC rises while TFC stays flat, so TC shifts upward from the TFC curve by the amount of TVC.

Average Costs

Average Fixed Cost (AFC) = TFC/Q — always falls as Q rises (spreading fixed costs thinner). Average Variable Cost (AVC) = TVC/Q, and Average Total Cost (ATC) = TC/Q = AFC + AVC. Both AVC and ATC are typically U-shaped due to increasing then decreasing returns.

Marginal Cost & Its Relationship to Averages

Marginal Cost (MC) = ΔTC/ΔQ, the cost of producing one more unit. MC falls then rises (mirroring the shape of marginal product). MC intersects AVC and ATC at their minimum points: when MC < average, average falls; when MC > average, average rises.

Key terms

Total Fixed Cost (TFC)

Costs that do not change with output, such as rent or insurance; incurred even at zero output.

Total Variable Cost (TVC)

Costs that change with the level of output, such as labor and raw materials.

Average Total Cost (ATC)

TC/Q = AFC + AVC; typically U-shaped, reflecting increasing then decreasing returns.

Marginal Cost (MC)

ΔTC/ΔQ; the added cost of producing one more unit. Intersects AVC and ATC at their minimum points.

Relationship between MC and Average Costs

If MC < average, average falls; if MC > average, average rises. This drives the U-shape of AVC and ATC.

Try an AP-style question

What is average total cost at Q = 10?

1. $10
2. $300
3. $30
4. $20