Important Characteristics of Cost Curves
1. The curve TFC is the curve of total fixed costs. Denoting constant characteristics of fixed cost at all level of output, TFC is a straight horizontal line, parallel to the X-axis.
2. The curve TVC represent total variable cost. It reflect the typical behaviour of total variable cost. It initially rises gradually but eventually becomes steeper, denoting a sharp rise in total variable costs.
3. The TC curve represents total cost. It is derived by vertically adding up TVC and TFC curves. The shape of the TVC and TC are identical. The only difference between two is of distance that is total fixed cost.
The firm will have four other short period categories of unit costs
(I) Average fixed Cost (AFC)
(II) Average Variable Cost (AVC)
(III) Average Total Cost (ATC) and
(IV) Marginal Cost (MC)
(I) Average fixed Cost (AFC): It is TFC divided by total output. AFC decreases as output increases.
AFC = TFC/TQ
AFC curve is a rectangular hyperbola.
II) Average Variable Cost (AVC) : It is TVC divided by total output. It is per unit cost of variable factors of production. AVC first decreases and then increase as the output increases.
AVC = TVC/TQ
AVC curve is dish shaped or U-shaped.
(III) Average Total Cost (ATC): Since ATC is the sum of AFC and AVC, it will decrease in the beginning as both component decreases initially. After a point AVC start increasing and pulls up the ATC along with it, out weighing the influence of ever decreasing AFC.
(IV) Marginal Cost (MC): Marginal Cost is the addition made to the total cost by the production of one more unit of commodity. Marginal cost is the rate of change in total costs when output is increased by one unit.
In a geometrical sense, marginal cost at any output is the slope of the total cost curve at the corresponding point. In the short run, the marginal cost is independent of fixed cost and is directly related to the variable cost.
Hence the MC curve can also be derived from TVC curve. As a matter of fact, AVC curve and MC curve are the reflection and the consequence of the law of variable proportion operating in the short run. MC also decreases initially but increases ultimately with the increase in output.
As shown in the fig above both the curves are U shaped, the explanation of which is as follows.
MC= TC n – TC n-1
MC = ∆TVC / ∆TQ
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