Page 128 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 9: Cost Concepts

Since the Average Product (AP) of an input is the total output divided by the number of units of Notes
input (V), so we can write

V = 1 = 1
Q Q/V AP
⎡⎤ ⎡ 1 ⎤
V
AVC =P ⎢⎥ =P ⎢ ⎣ AP ⎥ ⎦
⎣⎦
Q
That is, average variable cost is the price of the input multiplied by the reciprocal of the average

product of the input. We know that due to first increasing and then decreasing marginal returns
to the variable input, average product initially rises, reaches a maximum and then declines. Since
average variable cost is 1/AP, the average variable cost normally falls, reaches a minimum and

then rises. It first declines and then rises for reasons similar to those operating in case of TVC.
This is shown in Figure 9.2. (You will learn more about Average Product in the next unit.
Average Total Cost (ATC)

The average total cost or what is called simply average cost is the total cost divided by the number
of units of output produced. Therefore,
TC
ATC =
Q

Since the total cost is the sum of total variable cost and total fixed cost, the average total cost is
also the sum of average variable cost and average fi xed cost.
This can be proved as follows:

TC
ATC =
Q
Since TC = TVC + TFC

Therefore, ATC = TVC+ TFC
Q
TVC TFC
= +
Q Q
= AVC + AFC
!

Caution Average total cost is also known as unit cost, since it is cost per unit of output
produced.
The behaviour of the average total cost curve will depend on the behaviour of the average

variable cost curve and average fixed cost curve. In the beginning both AVC and AFC curves
fall. The ATC curve, therefore, falls sharply in the beginning. When AVC curve begins rising, but
AFC curve is falling steadily, the ATC curve continues to fall. But as output increases, there is a
sharp rise in AVC which more than offsets the fall in AFC. Therefore, the ATC curve rises after a
point. This is shown in Figure 9.2.

Short Run Marginal Cost (MC) and Output

Marginal cost is the addition to the total cost caused by producing one more unit of output.
In other words, marginal cost is the addition to the total cost of producing n units instead of
n-1 units.

MC = TC – TC
n n n–1

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