Fixed, Variable, and Marginal Costs
Cost curves translate production constraints into money. Fixed cost (FC) does not vary with current output over the chosen period; variable cost (VC) does. Total cost is
A restaurant's monthly lease may be fixed while ingredients and hourly labor vary with meals. “Fixed” describes behavior over a period, not permanence. In a longer horizon the lease can change.
Average and marginal measures
For positive output,
Average fixed cost continually falls as the same amount is spread across more units. Marginal cost measures the cost of one more unit:
Fixed cost disappears from MC because it does not change with output.
Cost table repair bench
Complete 3 orders before 3 wrenches break
Build each identity left to right. A submitted chain is welded; a wrong chain permanently costs one wrench.
Choose the first link.
Why the curves interact
MC is often U-shaped: specialization may lower it initially, then diminishing marginal returns raise it. When MC lies below AVC or ATC, it pulls that average down; when above, it pushes the average up. Thus MC crosses smooth AVC and ATC curves at their minimum points.
Do not divide a change by the wrong quantity. ATC is total cost divided by all output; MC is a change in cost divided by a change in output. The two answer different questions: average profitability uses ATC, while the next-unit decision uses MC.
Complete one row carefully
Let fixed cost be 120 and variable cost at be 220. Then , , , and . If total cost at was 270, the fourth unit's marginal cost is .
Notice that ATC and MC use different comparisons. ATC spreads the whole 340 across four units. MC compares two neighboring output levels. Replacing one with the other can produce a plausible-looking but incorrect answer.
Predict a fixed-cost change
If rent rises by 120, TC rises by 120 at every output. AFC and ATC rise, especially at low output where the increase is spread across few units. VC, AVC, and MC stay unchanged because rent does not change when one more unit is produced.
A practical checklist is: classify the cost, decide whether it changes with output, calculate totals, then divide only when an average is requested. Use neighboring rows only for marginal cost.
KNOWLEDGE QUIZ
Complete a manufacturer's cost table
A small parts factory has fixed cost 120. Variable cost at quantities 0–5 is 0, 60, 100, 150, 220, and 320.
- Calculate TC, AFC, AVC, ATC, and MC for every positive quantity.
- Identify the minimum AVC and ATC in the discrete table.
- Graph AVC, ATC, and MC and explain their intersections.
- Show how doubling fixed cost changes AFC, ATC, and MC.