Short-Run Average and Marginal Cost: AFC, AVC, ATC and MC

Dividing each of the total cost measures by output gives the corresponding AVERAGE cost, and the addition to total cost from producing one more unit gives MARGINAL cost.

Average Fixed Cost (AFC) $= \dfrac{TFC}{Q}$. Since TFC is a fixed sum being spread over an ever-larger number of units, AFC continuously FALLS as output rises, throughout the entire output range — this is sometimes called "spreading the overheads." Because TFC is always a positive amount, AFC keeps falling but mathematically never reaches zero, however large output becomes; its curve is a rectangular hyperbola, sloping down continuously and approaching (but never touching) the output axis.

Average Variable Cost (AVC) $= \dfrac{TVC}{Q}$. AVC typically FALLS at first (as increasing returns to the variable factor bring down the variable cost per unit), reaches a minimum, and then RISES (as diminishing returns set in) — giving AVC a U-shape.

Average Total Cost (ATC), also called Average Cost (AC), $= \dfrac{TC}{Q} = AFC + AVC$. Since ATC is the sum of a continuously falling AFC and a U-shaped AVC, ATC is also U-shaped, lying above AVC by exactly the vertical distance AFC at every output — and because AFC keeps shrinking as output grows, the gap between the ATC and AVC curves keeps narrowing as output increases.

Marginal Cost (MC) is the addition to total cost from producing one more unit of output:

Because TFC does not change with output, any change in TC is entirely due to the change in TVC, so $MC=\dfrac{\Delta TVC}{\Delta Q}$ as well — fixed cost plays no part in marginal cost at all. Like AVC and ATC, MC is U-shaped: it falls initially, reaches a minimum (at a LOWER output than where AVC or ATC reach their own minimum), and then rises sharply, reflecting the law of variable proportions.

The following schedule illustrates all seven cost measures together for a hypothetical firm with $TFC = Rs.\,60$: