3. TYPES OF COST:
Total fixed costs (TFC)
Average fixed costs (AFC)
Total variable costs (TVC)
Average variable cost (AVC)
Total cost (TC)
Average total cost (ATC)
Marginal cost (MC)
4. FIXED COSTS(FC)
Fixed Cost denotes the costs which do not vary with the level of production. FC
is independent of output.
Eg: Depreciation, Interest Rate, Rent, Taxes
Total fixed cost (TFC):
All costs associated with the fixed input.
Average fixed cost per unit of output:
AFC = TFC /Output
5. VARIABLE COSTS(VC)
Variable Costs is the rest of total cost, the part that
varies as you produce more or less. It depends on
Output.
Eg: Increase of output with labour.
Total variable cost (TVC):
All costs associated with the variable input.
Average variable cost- cost per unit of output:
AVC = TVC/ Output
6. TOTAL COSTS(TC)
The sum of total fixed costs and total variable
costs:
TC = TFC + TVC
Average Total Cost
Average total cost per unit of output:
ATC =AFC + AVC
ATC = TC/ Output
7. MARGINAL COSTS
The additional cost incurred from producing an additional unit
of output:
MC = TC
Output
MC = TVC
Output
8. TYPICAL TOTAL COST CURVES
TVC,TC is always increasing:
First at a decreasing rate.
Then at an increasing rate
10. AFC IS ALWAYS
DECLINING AT A
DECREASING RATE.
ATC and AVC decline
at first, reach a
minimum, then
increase at higher
levels of output.
The difference between
ATC and AVC is equal
to AFC.
MC is generally
increasing.
MC crosses ATC and AVC
at their minimum point.
If MC is below the average
value:
Average value will be
decreasing.
If MC is above the average
value:
Average value will be
increasing.
11. All costs are variable in the long run. There i
only AVC in LR, since all factors are variabl
LONG RUN COST
CURVE
12. ECONOMIES OF SCALE:
Economies of scale are the cost advantages that a firm obtains
due to expansion. Diseconomies is the opposite.
Two types:
1. Pecuniary Economies of Scale:
Paying low prices because of buying in large Quantity.
2.Real Economies of Scale:
Refers to reduction in physical quantities of input , per
unit of output when the size of the firm increases, as a result input
cost minimized.
13. DISECONOMIES:
1.INTERNAL ECONOMIES:
•IT IS A CONDITION WHICH BRINGS ABOUT A DECREASE IN LRAC OF THE FIRM
BECAUSE OF CHANGES HAPPENING WITHIN THE FIRM.
2. EXTERNAL ECONOMIES:
• IT IS A CONDITION WHICH BRINGS ABOUT A DECREASE IN LRAC OF THE FIRM
BECAUSE OF CHANGES HAPPENING OUTSIDE THE FIRM.
• E.G. TAXATION POLICIES OF GOVERNMENT
