Different Cost Curves - SS2 Economics Lesson Note
Cost curves are graphical representations of the relationship between the cost of production and the quantity of output produced. Here are the different types of cost curves:
-
Average Variable Cost (AVC) Curve: This curve represents the variable cost per unit of output, and it decreases initially and then increases as output increases.
Average Fixed Cost (AFC) Curve: This curve represents the fixed cost per unit of output, and it decreases as output increases.
Average Total Cost (ATC) Curve: This curve represents the total cost per unit of output, and it is the sum of AVC and AFC. It decreases initially and then increases as output increases.
Marginal Cost (MC) Curve: This curve represents the additional cost of producing one more unit of output, and it increases initially and then decreases as output increases.
The relationship between AVC, AFC, ATC and MC
Given the cost schedule below:
|
Quantity of output produced |
Average Variable Cost (AVC)
Average Fixed Cost (AFC)
Average Total Cost (ATC)
Marginal Cost (MC)
1
50
33.33
150.00
50
|
2 |
45
50.00
95.00
40
3
38
33.33
71.33
24
4
32
25.00
57.00
14
5
28
20.00
48.00
12
6
30
16.66
46.66
40
7
32
14.28
46.28
44
8
35
12.50
47.50
56
9
45
11.11
56.11
135
10
56
10.00
66.00
155
The relationship between these costs can be described as follows:
-
When AVC is decreasing, ATC is also decreasing, but at a decreasing rate. This is because as more units are produced, the fixed costs are spread over a larger number of units, which reduces the average fixed cost and lowers the average total cost.
When AVC is increasing, ATC is also increasing, but at an increasing rate. This is because the variable cost per unit is increasing, which raises the average total cost.
When MC is less than ATC, ATC is decreasing. This is because the marginal cost of producing an additional unit is less than the average total cost, which means that adding another unit reduces the average cost.
When MC is greater than ATC, ATC is increasing. This is because the marginal cost of producing an additional unit is greater than the average total cost, which means that adding another unit increases the average cost.