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sunk costs Another name for fixed costs
in the short run because firms have no choice but to pay them.
average fixed cost AFC Total fixed cost
divided by the number of units of output; a per-unit measure of fixed costs.
Average Fixed Cost AFC
q TFC
AFC
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spreading overhead The process of
dividing total fixed costs by more units of output. Average fixed cost declines as
quantity rises.
FIGURE 8.2 Short-Run Fixed Cost Total and Average of a Hypothetical Firm
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total variable cost TVC The total of all
costs that vary with output in the short run.
Total Variable Cost TVC VARIABLE COSTS
total variable cost curve A graph that
shows the relationship between total variable cost and the level of a firm’s
output.
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9 x 2 + 6 x 1 = 24 6 x 2 + 14 x 1 = 26
6 14
9 6
A B
3 Units of output
7 x 2 + 6 x 1 = 20 4 x 2 + 10 x 1 = 18
6 10
7 4
A B
2 Units of output
4 6
4 x 2 + 4 x 1 = 12 2 x 2 + 6 x 1 = 10
4 2
A B
1 Unit of output
TOTAL VARIABLE COST ASSUMING P
K
= 2, P
L
= 1 TVC
= K x P
K
+ L x P
L
USING TECHNIQUE
UNITS OF INPUT REQUIRED
PRODUCTION FUNCTION K L
PRODUCE TABLE 8.2
Derivation of Total Variable Cost Schedule from Technology and Factor Prices
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The total variable cost curve embodies information about both factor, or input, prices and technology. It shows the cost of production using the best available technique at each output
level given current factor prices.
FIGURE 8.3 Total Variable Cost Curve
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