Calculation of TC, ATC, FC, AFC, VC and AVC

What are the main costs a firm faces? 📊

Firms have Fixed Costs (FC) that stay the same no matter how much they produce, and Variable Costs (VC) that change with output.

Key cost formulas 💰

• Total Cost: $TC = FC + VC$
• Average Total Cost: $ATC = \frac{TC}{Q}$
• Average Fixed Cost: $AFC = \frac{FC}{Q}$
• Average Variable Cost: $AVC = \frac{VC}{Q}$

Example: The Bakery Analogy 🧁

Imagine a bakery that makes cupcakes.

1. Rent of the shop: $FC = £200$ per month (doesn't change with cupcakes sold).
2. Ingredients, electricity, and labour: $VC$ depends on how many cupcakes you bake.
3. If you bake 100 cupcakes, and ingredients cost £1 each, then $VC = 100 × £1 = £100$.
4. Total Cost: $TC = £200 + £100 = £300$.
5. Average Total Cost per cupcake: $ATC = \frac{£300}{100} = £3$.

Cost table for different output levels 📈

Revenue and Profit 📈💵

Revenue is what the firm earns from selling its product.

• Price per unit: $P$
• Quantity sold: $Q$
• Total Revenue: $TR = P × Q$
• Profit: $π = TR - TC$

Exam Tip Box 📚

Quick Practice Problem 🧠

Suppose a firm has a fixed cost of £500 and a variable cost that is £2 per unit produced. If the firm sells 200 units at £10 each, calculate:

1. Total Cost
2. Average Total Cost
3. Profit

Answer key: Total Cost = £900, ATC = £4.50, Profit = £1,000.

Key Takeaways 🎯

• Fixed costs stay constant; variable costs change with output.
• Use the cost formulas to analyse a firm's efficiency.
• Profit is the difference between total revenue and total cost.