■ Total costs:The sum of variable costs and fixed costs. Firms must rely on calculating total costs because that
calculation gives them a total accounting cost. It is a monetary figure that allows firms to see the combined effects
of their variable and fixed costs. Remember that fixed costs are independent of output levels; therefore, firms have
to pay them regardless of production levels. Variable costs, on the other hand, depend on the levels of output.
Although variable costs may not rise or fall at the same rate of output, they do change depending on output levels.
Total costs will always be present regardless of the level of production or output.Figure 9-4 illustrates fixed costs, variable costs, total costs, average fixed costs, average variable costs, average total
costs, and marginal cost.
Figure 9-4Average Costs
Firms are concerned with the average costs of their operations because they compare that figure with their per-product
price. Average fixed costis calculated by dividing total fixed cost by the quantity of output:
Average fixed cost = Total fixed cost / outputTotal fixed cost is the same regardless of output, but average fixed cost declines as output increases. Average fixed costs
decline as output increases because the quantity of output minimizes the monetary impact of fixed costs as it rises.
Average variable costis calculated by dividing the total variable cost by quantity. As resources are added, average
variable costs decline at first, then reach a low point, and then begin to increase. The average variable costs curve is
U-shaped and reflects this pattern.
At low levels of output, production is inefficient and expensive. It takes more money for producers to yield a smaller
amount of product than it does for them to make larger amounts. Take Costco, for example. Costco is a store that sells
in bulk. Because Costco buys in bulk, it receives its products from manufacturers at a discounted price. Manufacturers
have no problem selling Costco their products in bulk because they find it more cost efficient. This is how Costco is
able to charge a relatively lower price for some of its products than other stores.
Average total costis calculated by dividing total cost by quantity. You can find this cost by adding the average variable
cost to the average fixed cost. Total cost invariably means the total sum of the fixed costs and the variable costs.
Themarginal-cost curveincludes the additional cost of producing one more unit. To derive the marginal cost, you
must divide the change in total cost by the change in quantity:
Marginal cost = Change in total cost / change in quantityWhen a firm decides to produce one more unit, marginal cost becomes a key factor in its decision. If Rich owns a hot dog
stand, he will need to determine the value of making one more hot dog. Will the additional hot dog be worth making?
0 1 2 3 4 5Output
10 0
10 0
10 0
10 0
10 0
10 0Fixed
Costs
0
300
800
1400
210 0
2300Variable
Costs
10 0
400
900
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2200
2400To t a l
Costs
0
10 0
50
33.33
25
20Average
Fixed
Costs
0
300
400
466.66
525
460Average
Variable
Costs
0
400
450
500
550
480Average
To t a l
Costs
0
300
250
200
17 5
40Marginal
CostProduction Costs