3.1.3. Total, Average, Marginal, Fixed, and Variable Costs
Exhibit 10 shows the graphical relationships among total costs, total fixed cost, and total variable cost. The curve for total costs is a parallel shift of the total variable cost curve and always lies above the total variable cost curve by the amount of total fixed cost. At zero production, total costs are equal to total fixed cost because total variable cost at this output level is zero.
Exhibit 10. Total Costs, Total Variable Cost, and Total Fixed Cost
Exhibit 11 shows the cost curve relationships among ATC, AVC, and AFC in the short run. (In the long run, the firm will have different ATC, AVC, and AFC cost curves when all inputs are variable, including technology, plant size, and physical capital.) The difference between ATC and AVC at any output quantity is the amount of AFC. For example, at Q1 the distance between ATC and AVC is measured by the value of A, which equals the amount of fixed cost as measured by amount B at Q1. Similarly, at Q2, the distance between ATC and AVC of X equals amount Y of AFC. The vertical distance between ATC and AVC is exactly equal to the height of AFC at each quantity. Both average total cost and average variable cost take on a bowl-shaped pattern in which each curve initially declines, reaches a minimum-cost output level, and then increases after that point. Point S, which corresponds to QAVC, is the minimum point on the AVC (such as 2 units in Exhibit 13). Similarly, point T, which corresponds to QATC, is the minimum point on ATC (such as 3 units in Exhibit 13). As shown in Exhibit 11, when output increases, average fixed cost declines as AFC approaches the horizontal quantity axis.
3. ANALYSIS OF REVENUE, COSTS, AND PROFITS
Solution to 2: Overall, any decision involving the input factors should focus on how that decision affects costs, profitability, and risk—such that shareholders’ wealth is maximized. <span>3.1.3. Total, Average, Marginal, Fixed, and Variable Costs Exhibit 10 shows the graphical relationships among total costs, total fixed cost, and total variable cost. The curve for total costs is a parallel shift of the total variable cost curve and always lies above the total variable cost curve by the amount of total fixed cost. At zero production, total costs are equal to total fixed cost because total variable cost at this output level is zero. Exhibit 10. Total Costs, Total Variable Cost, and Total Fixed Cost Exhibit 11 shows the cost curve relationships among ATC, AVC, and AFC in the short run. (In the long run, the firm will have different ATC, AVC, and AFC cost curves when all inputs are variable, including technology, plant size, and physical capital.) The difference between ATC and AVC at any output quantity is the amount of AFC. For example, at Q 1 the distance between ATC and AVC is measured by the value of A, which equals the amount of fixed cost as measured by amount B at Q 1 . Similarly, at Q 2 , the distance between ATC and AVC of X equals amount Y of AFC. The vertical distance between ATC and AVC is exactly equal to the height of AFC at each quantity. Both average total cost and average variable cost take on a bowl-shaped pattern in which each curve initially declines, reaches a minimum-cost output level, and then increases after that point. Point S, which corresponds to Q AVC , is the minimum point on the AVC (such as 2 units in Exhibit 13). Similarly, point T, which corresponds to Q ATC , is the minimum point on ATC (such as 3 units in Exhibit 13). As shown in Exhibit 11, when output increases, average fixed cost declines as AFC approaches the horizontal quantity axis. Exhibit 11. Average Total Cost, Average Variable Cost, and Average Fixed Cost Exhibit 12 displays the cost curve relationships for ATC, A
Summary
| status | not read | reprioritisations | ||
|---|---|---|---|---|
| last reprioritisation on | suggested re-reading day | |||
| started reading on | finished reading on |