Costs — Edexcel A-Level Economics A
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Costs explained
Total cost (TC) is the sum of total fixed cost (TFC) and total variable cost (TVC): TC = TFC + TVC.
Read the full explanation
TFC does not vary with output; TVC changes with output. Average total cost (ATC) is TC divided by output (Q): ATC = TC ÷ Q. Average fixed cost (AFC) is TFC ÷ Q. Average variable cost (AVC) is TVC ÷ Q. Marginal cost (MC) is the change in TC when output increases by one unit: MC = ΔTC ÷ ΔQ. Since TFC is constant, MC also equals ΔTVC ÷ ΔQ. These formulae allow calculation of cost at any output level and show how average costs fall as fixed costs are spread over more units, while marginal cost reflects the additional cost of producing one more unit. For example, if TFC = £100, TVC = £50 at Q = 10, then TC = £150, ATC = £15, AFC = £10, AVC = £5. If output rises to 11 and TVC becomes £58, MC = (£158 − £150) ÷ 1 = £8.
Your focus
- State and use the formulae for total cost, total fixed cost and total variable cost.
- Calculate average total cost, average fixed cost, average variable cost and marginal cost from given data.
- Explain the relationships between total, average and marginal cost concepts.
Costs exam tips
Marking Points
- State and apply the formula TC = TFC + TVC.
- Calculate average total cost as TC ÷ Q, average fixed cost as TFC ÷ Q, and average variable cost as TVC ÷ Q.
- Calculate marginal cost as the change in total cost divided by the change in output (ΔTC ÷ ΔQ).
- Explain that marginal cost also equals the change in total variable cost divided by the change in output because fixed costs do not change.
- Use numerical examples to show the relationship between total, average and marginal costs.
Examiner Tips
- 💡Write down the relevant formula before substituting numbers to avoid mixing up average and marginal calculations.
- 💡Check that your units are consistent (e.g., all costs in pounds, output in units) and that you have used the correct output level.
- 💡When calculating marginal cost from a table, use the change in total cost between two consecutive output levels and divide by the change in output (usually 1).
Common Mistakes
- Confusing average and marginal concepts; correction: average cost divides total cost by output, while marginal cost is the extra cost of one more unit.
- Including fixed costs when calculating marginal cost; correction: marginal cost is based only on variable costs because fixed costs do not change with output.
- Dividing total cost by the change in output instead of output itself when finding average cost; correction: average cost uses total output, not the change in output.
- Forgetting that average fixed cost falls continuously as output rises; correction: AFC = TFC ÷ Q, so as Q increases, AFC decreases.