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Costs Experienced by the Firm for AQA ECON3
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Fixed Costs (FC)
• ‘A cost which is independent of output in the short run’
• This can include Rent on a Premises– In the short run this has to be paid no matter what so is
seen as fixed– In the long run the firm may close so rent doesn’t have
to be paid, so is then variable.
• They are costs which need to be paid even if production is zero.
• Fixed Costs can include:– Salaries of Permanent Employees– Costs of Machinery– Depreciation
Variable Costs (VC)
• ‘A cost which is related to output produced in the short run’
• These vary directly with output• An increase in output will require more raw
materials so this cost is directly linked to outputSemi Variable Costs• Costs which have both a fixed element and a
variable one• They vary with output but not proportionately• E.g. you will use a telephone if you produce more,
but not twice as much if you produce twice as much
Average Costs (AC)
• 3 Types– Average Fixed Costs (AFC)• Found by dividing the total fixed costs by the number of units
produced
– Average Variable Costs (AVC)• Found by dividing the total variable costs by the number of
units produced
– Average Total Cost (ATC)• Found by dividing the total costs of a firm by the number of
units produced
• Each one of these can be plotted on a graph
Marginal Costs (MC)
• ‘The addition to total cost from producing an extra unit of output’
• It is calculated by:– Taking the total cost (TC) and subtracting it from the TC
of the previous unit.
– Remember MC is always plotted between values.
Units Produced Total Cost Marginal Cost
0 0 -
100
1 100
100
2 200
Cost Curves
MC intersects the ATC curve at its lowest point
It is more common to see the graph drawn with only MC and ATC, which is normally labelled just AC
Definitions
• Total Costs: Are all costs of production of a product – includes fixed and variable costs
• Fixed Costs: A cost which is independent of output in the short run
• Variable Costs: A cost which is related to output produced in the short run
• Average Cost: The cost per unit• Marginal Cost: The addition to total cost from
producing an extra unit of output