Total cost curves

Define fixed costs

Costs which do not vary with output (e.g. rent, salaries)

Define variable costs

Costs which do vary with output due to diminishing marginal returns (e.g. wages, raw materials)

Describe the total fixed cost curve

Perfectly horizontal curve due to costs not varying with output

Describe the total variable cost curve

• Initially steep due to worker employment, suggesting TVC (e.g. wages) rise at a greater rate than MP, suggesting relatively high TFC

• Secondly shallow due to increased labour productivity, suggesting MP rise at a greater rate than TVC, suggesting relatively low TFC

• Eventually steep due to diminishing marginal returns, suggesting MP rise at a smaller rate than TVC, suggesting relatively high TFC

Describe the total cost curve

• Identical shape to TVC due TC = TVC + TFC

• Higher cost that TVC depending on the TFC (e.g. if the TVC is £50 and the TFC is £25, TC will be £75)