Livestock Economics, Marketing and Business Management

RELATIONSHIP BETWEEN TFC, TVC, AND TC

• Total fixed cost (TFC) is represented by a straight line parallel to X-axis and it remains unchanged for all output levels in a time period.
• TVC-is zero, when output is zero. It increases as output increases. The shape of TVC curve depends on the shape of the production function.
• TC is the sum of TFC and TVC. When no variable output is added, TC is equal to TFC.
• The TC curve is shaped exactly like the TVC curve, but is placed above the total variable cost by the units of total fixed cost. (Click to view graph)

Opportunity cost

• The income which an output can earn in the next best alternative use.

Physical risks

• Destruction of the product itself and are due to fire, accident, rain etc.
• Risk attached to such natural hazards is often transferred to institutions (Insurance companies) that specialize in assuming such risk.
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• Unit costs are
• • Average Fixed Cost (AFC),
  • Average Variable Cost (AVC),
  • Average Total Cost or Average Cost (ATC or AC)
  • Marginal Cost (MC).
• These unit costs are more important than total costs in decision making process. Plotting these, we get unit cost curves. (Click to view graph)

Average Fixed Cost

• Average Fixed Cost is worked out by dividing the Total Fixed Cost by the amount of output.
• It is fixed cost/unit of output. AFC will vary for each level of output.
• As output increases, AFC continues to decline. When output is zero, AFC=TFC. AFC always slopes downwards regardless of production function.
• AFC = TFC /Output

Average Variable Cost

• Average Variable Cost is calculated by dividing the Total Variable Cost by the amount of output.
• AVC decreases, reaches a minimum and increases thereafter. AVC cannot be computed when output is zero.
• AVC = TVC / Output

Average Total Cost

• Average Total Cost can be computed by dividing Total Cost by output.
• ATC, as AVC, first decreases, attains a minimum and increases thereafter.
• ATC is the cost of producing one unit of output.
• ATC = TC / Output

Marginal Cost

• Marginal Cost is the change in the Total Cost in response to a unit increase in output.
• It is found out by dividing change in total cost (or total variable cost because TFC is not going to change) by change in output.
• MC curve decreases first, reaches its minimum point and then raises upwards and passes through AVC and AC (ATC) at their minimum points.
• In other words, AVC and AC will slope downwards and keep falling as long as MC is below them.