Fixed and variable costs

Define implicit costs

Opportunity costs, which is the profit/returns that could’ve been made doing the next best alternative

Define explicit costs

• Costs that require direct payment to an agent

• Fixed costs, which do not vary with output (e.g. rent, salaries)

• Variable costs, which do vary with output (e.g. wages, raw materials)

Total fixed cost (TFC) formula

• Total cost (TC) - Total variable cost (TVC)

• Average fixed cost (AFC) * Total output (TQ)

Average fixed cost (AFC) formula

• Total fixed cost (TFC) / Total output (TQ)

• Average total cost (ATC) - Average variable cost (AVC)

Average variable cost (AVC) formula

• Total variable cost (TVC) / Total output (TQ)

• Average total cost (ATC) - Average fixed cost (AFC)

Describe the total fixed cost curve

Perfectly horizontal curve due to costs not varying with output

Describe the average fixed cost curve

• L-shaped curve due to fixed costs being spread across greater output

• Furthermore, AFC decreases as TQ increases

Describe the average variable cost curve

• U-shaped curve due to diminishing marginal returns

• Furthermore, AVC initially decreases when TQ increases but eventually increases