Fixed costs, those are independent of output produced. For transport it is usually rent or interest paid pn loans. With an increase of output, the fixed cost could be spread out across the business.
Variable costs vary with the output produced, for transport we could say that labour and fuel are variable costs.
Total costs are obviously = FC + VC
Average cost is the unit cost of production.
Marginal cost is the change in total cost which will occur when one more unit is produced. In transport it is usually an extra passenger or an extra cargo.
Ok, so in the diagram above:
1) A marginal cost curve (MC)
2) An average cost curve (AC)
3) An average variable cost curve (AVC)
4) An average fixed cost curve (AFC)
Ok, so now some explanations about why the curves are like this. If we look at the AFC, it falls down, because the fixed costs will stay the same when there's an increase in output. So, with more output the average fixed cost will be falling. This is also known as the economies of scale.
As output increases, AVC will initially decline before rising again, which explains the U-shape. With the rise of output, at some point average variable costs will exceed the falling average fixed costs, which will make the average cost curve rise.
A priori, the marginal cost curve will always cross the AVC and AC curves at their lowest points.
8 comments:
1. why does AVC rise?
2. is MC the same as ATC for the FIRST unit? If so why don't MC and ATC start at the same level?
1) It's because of the law of diminishing returns - as MC rises, average variable cost will rise, hence the U-shape of the curve.
2) Dunno really. Because it us stupid to calculate MC and ATC for the first unit?
If what you say is true then why is MC rising BELOW AVC as well as above?
In your diagram MC and ATV start at very different places - why?
You have not answered either question.
Investigate!
Because of the higher amount of the fixed cost!
I don't know! explain please!
and wtf is russian bodyguard!
If it is higher fixed cost then why not start MC at the same place as AVC?
Investigate!
That's what DAILY blogs are about - posting, discussing, sharing information
oh thank you for clarifying because I thought that daily blogs were created to torture my brain and me by not explaining the things I cannot find answers to on the internet!
oh thank you for clarifying because I thought that daily blogs were created to torture my brain and me by not explaining the things I cannot find answers to on the internet!
That's why you have a teacher - you could have asked this morning but....oh yes, you weren't there.
http://efeconomics.blogspot.com/2009/09/a2-economics-homework.html
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