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# Fixed, variable, and marginal cost

Explore how to think about average fixed, variable, and marginal costs, and how to calculate them, using a firm's production function and costs in this video. Created by Sal Khan.

## Want to join the conversation?

• According to my economics course, average variable cost is of the same structure as average total cost, in that they both fall to a minimum before they rise again. In this video, AVC rises straight away.
The reason my course materials give for this is that the marginal product of each unit of labour normally increases before it falls: so instead of the first two workers losing productivity when working together, at this stage it would increase.

Does anyone know which is more accurate?
• It depends on the nature of the work:
-If the workers are basically doing the same type of work, and then need to coordinate (i.e. they aren't really receiving a benefit to their work from the other workers, but instead are losing out on productivity through meetings and coordination) then you would expect the marginal product to fall straight away

-However, suppose that the workers specialize. e.g. One worker builds chairs, and the other worker paints them. This would increase marginal productivity, because one worker wouldn't have to waste all his time setting up the spray booth, putting on a respirator, etc. for each chair. The additional worker would do this once for the day and then be productive painting all day.

-Another scenario would be workers bring other skills or knowledge to the table that they share with the other workers that results in the other workers becoming more productive as individuals (they would be more productive as workers after, even if they left the team)

So, basically, the answer is it depends on the nature of the work, and how the labour will be organized.
• How does the law of diminishing marginal product affect the shape of the marginl cost curve?
• Well as you can see from the last column in his spreadsheet, as the marginal productivity dropped, the marginal cost began to skyrocket. Eventually it became "negative", which sounds weird, but meant productivity is actually being sacrificed. (I'm not sure that's really a realistic scenario though. If you have more people than you know what to do with, you reassign them to do QA preparation, or brainstorm on future versions - things that wouldn't hinder productivity of the rest of the team.)
• What is the difference between the short run and the long run and what is an example of each?
• Short run is the period when there are some fixed factors of production/inputs such as land, machinery etc which can not be changed while there are some variable factors such as labour which can vary. However in the long run all the factors of production/inputs are variable.
• It is said fixed costs exist only in short run.....
Variable costs exist in both short and long run....why?
• Fixed costs come from resources that can't be easily changed in the short run (ej a building). In the long run, producers can choose to build more buildings or leave their buildings (eliminating fixed costs). Fixed costs only exist in the short run b/c at least one factor of production is constrained in the short run (definition of short run). In both short run and long run, variable costs exists because producers have to put in inputs to get out products. Take for example, a bean factory. In the short run, the farmer who owns the bean factory is constrained to twenty acres of land. Even if the farmer doesn't produce any beans, he still has to pay for his land (an example of fixed costs). In the long run, the farmer can choose to rent more acres of land and grow more beans (both variable costs).
• How do you find the fixed cost if you are not given it, or any information other than, units of output and total cost.
(1 vote)
• The cost when there is 0 output is the fixed cost.
• What about synergy Sal!? :)
• These tutorials only break down in chunks the components of micro dynamics. It's not supposed to show you the whole picture. It's teaching you key concepts for you to understand on a deeper level.
• why is Marginal Cost also the average? or does that mean it is the average amount of money being spent to add an additional unit?
• Will the marginal cost equal the actual cost of producing an additional unit of output or is it an approximation ?
(1 vote)
• In the theoretical model, yes, in the long-run the marginal cost is equal to the additional unit of output. This is because the foundations of the models taught are based in mathematics in order for practical study.

It is hard to explain without complicated calculus but the cost of an additional unit only will truly equal the marginal cost when you impose a limit of infinity - which is a concept that is logically flawed.

I had a hard time accepting a lot of the assumptions in foundational economics courses because they seemed to not fit with reality but after many, many, years of study I can tell you now that understanding the concept is the goal and the fact that it doesn't square with the real world is something you don't have to worry about unless you make economics your career.