Total variable cost (TVC) is cost that varies with the level of output. Total fixed cost (TFC) is cost that does not vary with output. Total cost (TC) is the sum of total variable cost and total fixed cost:
TVC+TFC=TC
Marginal and Average Costs
Marginal and average cost curves, which will play an important role in the analysis of the firm, can be derived from the total cost curve. Marginal cost shows the additional cost of each additional unit of output a firm produces. This is a specific application of the general concept of marginal cost presented earlier. Given the marginal decision rule's focus on evaluating choices at the margin, the marginal cost curve takes on enormous importance in the analysis of a firm's choices. The second curve we shall derive shows the firm's average total cost at each level of output.Average total cost (ATC) is total cost divided by quantity; it is the firm's total cost per unit of output:
ATC=TC/Q
We shall also discuss average variable costs (AVC), which is the firm's variable cost per unit of output; it is total variable cost divided by quantity:
AVC=TVC/Q
We are still assessing the choices facing the firm in the short run, so we assume that at least one factor of production is fixed. Finally, we will discuss average fixed cost (AFC), which is total fixed cost divided by quantity:
AFC=TFC/Q
Marginal cost (MC) is the amount by which total cost rises with an additional unit of output. It is the ratio of the change in total cost to the change in the quantity of output:
MC=ΔTC/ΔQ
It equals the slope of the total cost curve. "Total Cost and Marginal Cost" shows the same total cost curve that was presented in "From Variable Cost to Total Cost". This time the slopes of the total cost curve are shown; these slopes equal the marginal cost of each additional unit of output. For example, increasing output from 6 to 7 units (ΔQ=1 ) increases total cost from $480 to $500 (ΔTC=$20 ). The seventh unit thus has a marginal cost of $20 (ΔTC/ΔQ=$20/1=$20 ). Marginal cost falls over the range of increasing marginal returns and rises over the range of diminishing marginal returns.