COST ANALYSIS

Costs in the Short run

Fixed costs and variable costs Total costs
total fixed cost (TFC) (TFC) total variable cost (TVC) (TVC) total cost (TC = TFC + TVC) (TC TVC)

Output TFC (Q) (Rs)

100

Total costs for firm X

80

60

40

0 1 2 3 4 5 6 7

12 12 12 12 12 12 12 12

20

0 0 1 2 3 4 5 6

TFC
7 8

100

Output TFC TVC (Q) (Rs) (Rs) 0 1 2 3 4 5 6 7 12 12 12 12 12 12 12 12 0 10 16 21 28 40 60 91

Total costs for firm X

TV C

80

60

40

20

TFC
0 0 1 2 3 4 5 6 7 8

100

Output TFC TVC TC (Q) (Rs) (Rs) (Rs) 0 1 2 3 4 5 6 7 12 12 12 12 12 12 12 12 0 10 16 21 28 40 60 91 12 22 28 33 40 52 72 103

Total costs for firm X

TC TVC

80

60

40

20

TFC
0 0 1 2 3 4 5 6 7 8

Costs in the Short run

Marginal cost
Additional cost for producing additional output Slope of TC First derivative of total cost function

Output TFC TVC TC (Q) (Rs) (Rs) (Rs)

100

Total costs for firm X

TC

80

60

0 1 2 3 4 5 6 7

12 12 12 12 12 12 12 12

0 10 16 21 28 40 60 91

12 22 28 33 40 52 72 103

MC

40

20

TFC
0 0 1 2 3 4 5 6 7 8

Average and marginal costs

MC

Costs (Rs)

Output (Q)

Costs in the Short run

Average cost
average fixed cost (AFC) (AFC) average variable cost (AVC) (AVC) average (total) cost (AC) (AC)

Average and marginal costs

MC AVC

Costs (Rs)

y x

Output (Q)

Average and marginal costs

MC AVC

Costs (Rs)

y x AFC

Output (Q)

Average and marginal costs

MC AC AVC

Costs (Rs)

z y x AFC

Output (Q)

Costs in the Short run

Relationship between the marginal and total cost curves Marginal / average cost (MC) and the law (MC) of diminishing returns

Total costs for firm X

TC
100

MC

AC

80

60

40

20

0 0 1 2 3 4 5 6 7 8

Comparison of production and cost

40

TPP
30

TC
20
100

10
80

MC AC
0 1 2 3 4 5 6 7 8
60

a
14 12 10 8 6 4
40

20

a
0 0 1 2 3

b
4 5 6 7 8

APP
2 0 -2 0 1 2 3 4 5 6 7 8

MPP

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