Curve of Short Term Costs
•In order to increase the production of output the firm needs to employ more of the variable inputs.
•This results in an increase in total variable cost, and hence, an increase in total cost.
•The curves are for total fixed cost (TFC), total variable cost (TVC) and total cost (TC) curves for a firm.
•Total cost is the vertical sum of total fixed cost and total variable cost.
Average Fixed Cost
•AFC is the ratio of TFC to q.
•TFC is a constant.
•Therefore, as q increases, AFC decreases.
•When output is very close to zero, AFC is arbitrarily large, and as output moves towards infinity, AFC moves towards zero.
•AFC curve is a rectangular hyperbola.
•If we multiply any value q of output with its corresponding AFC, we always get a constant, namely TFC.
TFC = AFC × quantity
= OF × Oq1
= the area of the rectangle OFCq1
Calculation of AFC from TFC curve
•The horizontal straight line cutting the vertical axis at F is the TFC curve.
•At q0 level of output, total fixed cost is equal to OF.
•Let the angle AOq0 be ϑ.
•The AFC at q0 is TFC/ q0
•= tan ϑ
Short run marginal cost (SMC) characteristic
•Marginal cost is the additional cost that a firm incurs to produce one extra unit of output.
•At zero level of output, SMC is undefined.
•Initially, the marginal product of a factor increases as employment increases, and then after a certain point, it decreases.
•As a result, with the factor price given, initially the SMC falls, and then after a certain point, it rises. SMC curve is, therefore, ‘U’-shaped.
SMC and TVC
•The TVC at a particular level of output is given by the area under the SMC curve up to that level.
The Average Variable Cost Curve
•For the first unit of output, SMC and AVC are the same. So both SMC and AVC curves start from the same point.
•Then, as output increases, SMC falls. AVC being the average of marginal costs, also falls, but falls less than SMC.
•Then, after a point, SMC starts rising. AVC, however, continues to fall as long as the value of SMC remains less than the prevailing value of AVC.
•Once the SMC has risen sufficiently, its value becomes greater than the value of AVC.
•The AVC then starts rising.
•The AVC curve is therefore ‘U’-shaped.
The Average Variable Cost Curve.
•At q0 level of output, AVC is equal to OV .
•The total variable cost at q0 is
•TVC = AVC × quantity
= OV × Oq0
= the area of the rectangle OV Bq0.
•The area of the rectangle OVBq0 gives us the total variable cost at q0.