Explaining Fixed and Variable Costs of Production

Key Terms

Average fixed cost: Fixed cost per unit AFC= TC/Q

Average total cost: AC = cost per unit = TC/Q

Average variable cost: Variable cost per unit; AVC = TVC/Q

Diminishing marginal productivity: Falling MP as more units of a variable factor are added to a fixed factor

Long run production: Time period where all factor inputs are variable

Marginal cost: MC is change in total cost from supplying one extra unit

Short run production: Time period when at least one factor input is fixed

Sunk cost: A cost that cannot be recovered in a business closes down or leaves an industry

Total cost: TC = total fixed cost + total variable cost

Total fixed cost: Costs that do not depend on the level of output in the short run

Total variable cost: Variable costs are costs that vary directly with the level of output