Principles of Economics/Costs to Firm

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Average fixed cost[edit]

HouFixedCost.png

The above graph adopts the axes we will be using quite often in economics: quantity on the x and price on the y. Fixed costs for a firm are unchanging but are spread over additional units, resulting in lower average fixed costs.

Total fixed cost[edit]

FixedCost2.png

At any particular production point, we can show the total fixed cost as the pink rectangle. No matter where the gray line is placed, the area of the pink rectangle will be constant. Average is the height at a particular point; total is the area.

Average and marginal variable cost[edit]

HouVariableCost.png

The green curve is the marginal cost, the cost of producing an additional unit of a good and includes only variable cost (no fixed cost). This curve starts very high but rapidly falls through increasing returns to scale (increasing productivity), then starts rising as resources become more scarce and costly and/or less suitable. The pink average variable cost curve trails the marginal cost, rising when marginal cost is higher than the average and falling when marginal cost is lower. The average variable cost is flat at the point when it is the same as the marginal cost.

Individual Supply[edit]

VariableCost2.png

The new pink line, average total cost, combines average fixed cost with average variable cost. This leads to the firm's individual supply curve, which is for intents identical to the marginal cost and so also colored green.