Diagrams of Cost Curves

• Total Fixed Cost (TFC) – costs independent of output, e.g. paying for factory
• Marginal cost (MC) – the cost of producing an extra unit of output.
• Total variable cost (TVC) = cost involved in producing more units, which in this case is the cost of employing workers.
• Average Variable Cost AVC = Total variable cost / quantity produced
• Total cost TC = Total variable cost (VC) + total fixed cost (FC)
• Average Total Cost ATC = Total cost / quantity

Costs in the short run

Short run cost curves tend to be U shaped because of diminishing returns.

In the short run, capital is fixed. After a certain point, increasing extra workers leads to declining productivity. Therefore, as you employ more workers the marginal cost increases.

Diagram of Marginal Cost 

Because the short run marginal cost curve is sloped like this, mathematically the average cost curve will be U shaped. Initially, average costs fall. But, when marginal cost is above the average cost, then average cost starts to rise.

Marginal cost always passes through the lowest point of the average cost curve.

Average Cost Curves

• ATC (Average Total Cost) = Total Cost / quantity
• AVC (Average Variable Cost) = Variable cost / Quantity
• AFC (Average Fixed Cost) = Fixed cost / Quantity

Costs

Fixed, variable and total cost curves

Total cost (TC) = Variable cost (VC) + fixed costs (FC)

Long Run Cost Curves

The long-run cost curves are u shaped for different reasons. It is due to economies of scale and diseconomies of scale. If a firm has high fixed costs, increasing output will lead to lower average costs.

However, after a certain output, a firm may experience diseconomies of scale. This occurs where increased output leads to higher average costs. For example, in a big firm, it is more difficult to communicate and coordinate workers.

Diagram for Economies and Diseconomies of Scale 

Note, however, not all firms will experience diseconomies of scale. It is possible the LRAC could just be downward sloping.

Related

• Diagram of Monopoly
• Diagram of Perfect competition