Economics, 3rd Edition

average fixed cost

 fixed costs divided by the quantity of output

average variable cost

 variable costs divided by the quantity of output

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CHAPTER 6  BACKGROUND TO SUPPLY: FIRMS IN COMPETITIVE MARKETS  141

MC =

ΔTC

ΔQ

Using calculus:

MC =

dTC

dQ

marginal cost

 the increase in total cost that arises from an extra unit of production

We can derive various average cost measures and marginal cost from the total cost function of the 

type TC

= f(Q).

If the total cost function is given as TC

= 7Q

2

+ 5Q + 1,500 we can see that the fixed costs are 1,500. 

If Q

= 0, then TC would be 1,500. The terms 7Q

2

+ 5Q are the variable costs, therefore.

AC would be 

7Q

2

+ 5Q + 1,500

Q

, AVC would be 

7Q

2

+ 5Q

Q

 and AFC would be 

1,500

Q

 Marginal cost would 

be 

dTC

dQ

= 14Q + 5.

Cost Curves and their Shapes

Just as in previous chapters we found graphs of supply and demand useful when analysing the behaviour 

of markets, we will find graphs of average and marginal cost useful when analysing the behaviour of 

firms. Figure 6.3 graphs Luciano’s costs using the data from Table 6.2. The horizontal axis measures the 

quantity the firm produces, and the vertical axis measures marginal and average costs. The graph shows 

four curves: average total cost (ATC ), average fixed cost (AFC ), average variable cost (AVC ) and marginal 

cost (MC ).