Costs Variable costs costs of Fixed costs costs

Costs • Variable costs – costs of • Fixed costs – costs of production that change production that must be depending on the paid whether zero units quantity of production. are produced or 2000 • Examples include are produced. These wages, costs of raw costs do not change and materials, electricity. are set for a period of time. • Examples include rent, interest and • Total cost = Fixed cost principle payments on plus variable cost loans, insurances.

Fixed cost, Variable cost and Total Quantity Fixed cost Variable Total cost 0 100 1 100 30 130 2 100 50 150 3 100 80 180 4 100 130 230

Average costs – Costs divided by the quantity produced • Average variable cost • Average Fixed cost • = Fixed cost / quantity • As this cost is unchanging the graph will slope downwards towards zero but not touch. • As production increases fixed costs are spread over more output so the average will decrease. • = Variable cost / quantity • As these costs change average cost will fall initially as increasing returns occurs but as diminishing returns occurs due to increased costs and factor inefficiency, then costs will raise. • So AVC slopes down and then up again like a u shape.

Average Cost • Average cost = total cost divided quantity. • Or average fixed cost plus average variable cost. • Graph is above the variable cost curve and is drawn closer to AVC on the right side than the left which represents AFC decreasing. Marginal cost • The extra cost of producing one more good. • Total cost 2 – total cost 1 = Marginal cost. • Upward sloping curve that is shaped like the Nike tick √ • MC cuts the AC/ AVC at the lowest point

Calculations example Quantity Total cost Average cost Marginal cost 0 100 - - 1 200 100 2 320 160 120 3 420 140 100 4 640 160 220 5 1100 220 460

Shut down points Breakeven points • When the Price received • When the price received is equal to the point where AVC= MC. AC= MC. • A firm will not operate • So that a firm operating below this point as it is at this point can cover unable to cover the fixed costs and economic costs variable costs associated with the production e. g. variable production of goods. costs