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| | * total cost (TC) | | * total cost (TC) |
| | * average total cost (ATC) | | * average total cost (ATC) |
| − | * fixed cost (FC, which is also the total fixed cost because there is nothing to sum) | + | * fixed cost (FC, which is also the total fixed cost because there is nothing to sum up) |
| | * average fixed cost (AFC) | | * average fixed cost (AFC) |
| | * total variable cost (TVC) | | * total variable cost (TVC) |
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| | :FC = TC(when Q=0) = 5*0 + 200 = $200 | | :FC = TC(when Q=0) = 5*0 + 200 = $200 |
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| − | Often an exam question will give you a table of units produced in the first column, and total costs in the second column, and then ask you to use the table to calculate all seven of the above costs. Here is a simple guide: | + | Often an exam question will give you a table of units produced in the first column, and total costs for each level of output in the second column, and then ask you to use the table to calculate all seven of the above costs. Here is a simple guide: |
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| | *FC is the cost when Q=0 | | *FC is the cost when Q=0 |
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| | In perfect competition, firms sell more and more Q until MR (marginal revenue) falls to the level of MC (marginal cost). Stated another way, firms sell at the point where MR = MC. Do not confuse MC with AVC; there are different concepts and it is tricky to relate one to the other. MC does equal AVC for the first unit produced (Q=1), but probably not for any other units. In addition, the difference between TVC's for unit Q and Q-1 is equal to the MC, and from that you can derive a relationship between AVC and MC (see honors analysis below). | | In perfect competition, firms sell more and more Q until MR (marginal revenue) falls to the level of MC (marginal cost). Stated another way, firms sell at the point where MR = MC. Do not confuse MC with AVC; there are different concepts and it is tricky to relate one to the other. MC does equal AVC for the first unit produced (Q=1), but probably not for any other units. In addition, the difference between TVC's for unit Q and Q-1 is equal to the MC, and from that you can derive a relationship between AVC and MC (see honors analysis below). |
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| − | Master the above and you will both ace exams and be able to run a successful business. Experienced business managers state that profitability is made by reducing expenses. This has certainly been true for Wal-Mart. It is constantly driving costs down with its suppliers. Remember: a penny saved is a penny earned. Actually, due to taxes, saving a penny is sometimes worth more than a penny earned. | + | Master the above and you will both ace exams and be able to run a successful business. Experienced business managers state that profitability is achieved primarily by reducing expenses. This has certainly been true for Wal-Mart. It is constantly driving costs down with its suppliers. Remember: a penny saved is a penny earned. Actually, due to taxes, saving a penny is sometimes worth more than a penny earned. |
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| | == Honors Only: Applying Cost Measures to Perfect Competition == | | == Honors Only: Applying Cost Measures to Perfect Competition == |