5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Table 8.3 summarizes Molly’s costs of producing cups of lemonade per minute. Her

total fixed costs are assumed to be $6 per minute, and total variable costs increase as pro-

duction increases.

Figure 8.3 illustrates the three total cost functions. Total fixed cost is a constant at all

levels of output. Total variable cost quickly rises at first, briefly slows, and then proceeds to

increase at an increasing rate. Total cost is simply the sum of TFC and TVC at every level

of output, and so it lies parallel to TVC. Thus, the vertical distance between TC and TVC

is equal to TFC.

Table 8.4

AVERAGE AVERAGE

TOTAL PRODUCT MARGINAL COST AVERAGE FIXED VARIABLE TOTAL

CUPS PER MINUTE (MC) COST (AFC) COST (AVC) COST (ATC)

0

1 $5 $6.00 $5 $11.00

2 $3 $3.00 $4 $$7.00

3 $5 $2.00 $4.33 $$6.33

4 $6 $1.50 $4.75 $$6.25

5 $7 $1.20 $5.20 $$6.40

6 $8 $1.00 $5.67 $$6.67

7 $9 $0.86 $6.14 $$7.00

Marginal and Average Costs

Similar to our discussion of production, we can derive marginal and per unit measures of

cost from the total cost functions. These are in Table 8.4.

1. Marginal costis the additional cost of producing one more unit of output MC =
   DTC/DQ. Since TVC are the only costs that change with the level of output, marginal

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Total Costs

$0

$10

$20

$30

$40

$50

$60

01234567

Cups per Minute

$

Total Fixed

Cost

Total Variable

Cost

Total Cost

(TC = TFC + TVC)

Figure 8.3

KEY IDEA

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