In this video we’ll use some cost information to calculate average fixed cost, average variable
cost, average total cost and marginal cost.
After watching this video you’ll be able to graph and calculate average fixed costs,
average variable costs, average total costs and marginal cost.
Assume the following levels of output and costs for a firm.
You’ll remember how to calculate the marginal cost for a firm by looking at the difference
between total cost at that level of output and total cost and prior level of output.
Using that difference we divide by the change in the level of output so our calculation
would be $20 minus $10 divided by 1 unit of output minus 0 units of output.
This simplifies to $10 divided by 1 and our marginal cost of producing one unit is $10.
Using the same approach we can complete the rest of the table.
Calculating average fixed cost tends to be the simplest for most economics students.
Since fixed costs don’t change in the short run, they are always constant.
To calculate average fixed cost you divided the fixed costs by output.
You’ll notice average fixed costs will initially be high but then continue to decrease as output
increases.
This should be common sense for the most part.
If I am renting a building and producing only one unit of output, then the average fixed
cost for that unit is quite high relative to using the same building to produce 1,000
units of output.
In which case the average fixed cost will be much lower.
To calculate average variable cost we divided total variable costs by the level of output.
Since variable costs change with output the shape of the average variable cost curve is
different to that of the average fixed cost curve.
As the firm becomes more efficient the average variable cost tends to fall but rises as diminishing
returns set in.
As we did in our previous video, average total cost is calculated by dividing total costs
by total output.
As we saw in the earlier video it is a combination of the values of average fixed costs and average
variable costs.
Therefore it is always above both the AFC and AVC curves.
Here’s the graph completed but I’ll show you the points plotted for marginal cost.
As before, we plot the point in between output values.
So you’ll see as output increase we have an initial drop in marginal costs, but as
it bottoms out costs start to rise.
This is tied to the diminishing marginal returns of labour as mentioned previously
Here we follow the average fixed cost per unit of output and it’s clear to see that
as output increases, average fixed cost decreases.
When we graph average variable costs we’ll notice they drop, bottom out and begin to
rise.
Marginal cost will always cut average variable cost at the bottom of the curve.
The behaviour of the curve is also linked to the law of diminishing returns.
Since average total cost is the combination of average fixed and average variable cost
it should initially fall, bottom out and rise.
You’ll notice that marginal cost also cuts average cost at its bottom and causes to rise
as it exceeds the average value.
This final graph is what you’re most likely to come up against in your studies and exams.
I haven’t seen a problem or question that requires you to graph data from a table but
you should be comfortable in doing it.
Whenever you draw these curves they should have similar shapes and exhibit the relationships
we’ve demonstrated in this tutorial.
This is a diagram taken from online showing you another version of what you could see.
The initial points for these curves are along the Y-axis.
This is not as important as understanding the later behaviour of these curves at this
point in time.
If you’d like to understand why this diagram is drawn in such a way, you should consider
the costs for the firm and think about how they may differ from the example I used earlier
in the tutorial.
MC still and always cuts AVC and AC at their lowest points.
You should now be more familiar with calculating and graphing AFC, AVC, ATC and MC.
If you’re still uncomfortable with it, go back into the video, copy the data and graph
it for yourself.
Practice will get you there.
In the meantime, leave any questions, comments or feedback below and I’ll do my best to
answer them.
You can also email me at enhancetuition@gmail.com and I will try and respond.
That’s us done for now and I will see you in the next one!