CHAPTER • The Cost of Production 239 TC Cost 400 (dollars per year) 300 VC 175 A F IGURE 7.1 100 FC (a) 10 11 Output (units per year) Cost 100 (dollars per unit) 75 MC 50 ATC AVC 25 AFC (b) 10 11 Output (units per year) Observe in Figure 7.1 (a) that fixed cost FC does not vary with output—it is shown as a horizontal line at $50 Variable cost VC is zero when output is zero and then increases continuously as output increases The total cost curve TC is determined by vertically adding the fixed cost curve to the variable cost curve Because fixed cost is constant, the vertical distance between the two curves is always $50 Figure 7.1 (b) shows the corresponding set of marginal and average variable cost curves.4 Because total fixed cost is $50, the average fixed cost curve AFC falls continuously from $50 when output is 1, toward zero for large output The shapes of the remaining curves are determined by the relationship between the marginal and average cost curves Whenever marginal cost lies below average cost, the average cost curve falls Whenever marginal cost lies above average cost, the average cost curve rises When average cost is at a minimum, marginal cost equals average cost THE AVERAGE-MARGINAL RELATIONSHIP Marginal and average costs are another example of the average-marginal relationship described in Chapter The curves not exactly match the numbers in Table 7.1 Because marginal cost represents the change in cost associated with a change in output, we have plotted the MC curve for the first unit of output by setting output equal to 12 , for the second unit by setting output equal to 112 , and so on COST CURVES FOR A FIRM In (a) total cost TC is the vertical sum of fixed cost FC and variable cost VC In (b) average total cost ATC is the sum of average variable cost AVC and average fixed cost AFC Marginal cost MC crosses the average variable cost and average total cost curves at their minimum points