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Economic Theory

where Q is the total output. Total fixed cost is the same regardless of
output, but average fixed cost declines as output increases. Average fixed
costs decline as output increases because the quantity of output minimizes
the monetary impact of fixed costs as it rises.

The average variable cost is found by dividing the total variable costs
by the total units of output, i.e., it is per unit cost of the variable inputs.

Symbolically,

TVC
AVC  . (8.5)
Q

Average variable cost falls initially, reaches a minimum when the
plant is operated optimally and rises after the point of normal capacity has
been reached. At low levels of output, production is inefficient and

expensive. It takes more money for producers to yield a smaller amount of
product than it does for them to make larger amounts.
ATC is the per unit cost of both fixed and variable inputs. Average

total cost of production can be obtained by dividing total cost by the units
of output, i.e.,

TC
ATC  (8.6)
Q

or
TFC  TVC
ATC  (8.7)
Q

or
ATC  AFC  AVC . (8.8)

Average total cost or ATC curve has the similar shape as that of AVC,

that is, U-shaped.
Marginal cost is the addition to the total cost as a result of a unit (one
unit) increase in the output.

It is expressed as:

MC  TC  TC n 1 , (8.9)
n

where n is the number of units of output.

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