Question

Please explain the 7 short run production costs and how might a business manager use this information. Or what it means to a business manager.

1) Total Fixed Costs

2) Ttotal Variable Costs

3)Total Costs

4)Average Fixed Costs

5) Average Variable Costs

6) Average Total Costs

7)Marginal Costs

Answer 1

1) Total Fixed Costs

Total fixed cost is the cost that remains constant at all levels of output. This cost always remains constant and the output does not affected by the fixed cost. Fixed cost is the cost used to procure the fixed assets. In the short run the producer cannot change the fixed cost.

Diagrammatically it is represented by a straight horizontal line parallel to the output axis.

2) Total Variable Costs

It varies or changes according to the change in the output. Output is the function of variable cost. In the short run the producer can produce more by the use of variable cost only. It increases or decreases by the increase and decrease in the output. Raw-materials, wages are the examples of variable cost.

3) Total Costs

In short run total cost is the addition of Total Fixed Cost and Total Variable Cost.

TC = TFC + TVC

It increases and decreases by the changes in the variable cost only because fixed cost always remain constant. It is the total cost of production.

4) Average Fixed Costs

Average Fixed Cost is the fixed cost per unit of output.

AFC = TFC/Quantity produced.

AFC always decreases as more and more output is produced. But cannot be zero and negative. It is also called as a rectangle hyperbola.

5) Average Variable Costs

It is the variable cost per unit of output.

AVC = TVC / Quantity produced.

Average variable cost initially decreases and reaches to minimum and after that it increases. It is a U shaped curve.

6) Average Total Costs

It is the cost per unit of output. It is the addition of the average fixed and average variable cost.

ATC = TC/ Quantity produced

Average total cost initially decreases and reaches to minimum and after that it increases. It is a U shaped curve.

7) Marginal Costs

It is the difference in the total cost when the producer produces one more additional unit of output. It is the cost of the additional unit.

MC = TCn – TCn-1

Marginal cost initially decreases and reaches to minimum and after that it increases. It is a U shaped curve.