How do a firm's fixed and variable costs combine into the short-run cost curves, and why are they shaped the way they are?
Topic 3.2 Short-Run Production Costs: define fixed, variable, total, marginal, and average costs, calculate each from data, and explain the shapes of the short-run cost curves and how marginal cost relates to the averages.
A focused answer to AP Microeconomics Topic 3.2, covering fixed, variable, and total cost, average fixed, average variable, average total, and marginal cost, how to calculate each, and the shapes and relationships of the short-run cost curves, with worked exam-style questions.
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What this topic is asking
Topic 3.2 turns the product curves of Topic 3.1 into cost curves. The College Board wants you to define fixed, variable, and total cost, calculate average fixed, average variable, average total, and marginal cost, and explain the shapes of the short-run cost curves, especially how marginal cost relates to the two relevant averages. These curves are the firm's decision tools for the rest of the unit.
Fixed, variable, and total cost
In the short run, at least one input is fixed, so fixed cost exists; in the long run there are no fixed costs because all inputs can be varied (Topic 3.3). The split matters for the firm's shut-down decision in Topic 3.6: fixed costs must be paid even if the firm stops producing, so they are irrelevant to the short-run choice of whether to keep operating.
The average and marginal costs
- Average fixed cost (AFC) falls continuously as output rises, because a constant fixed cost is spread over more units (the "spreading the overhead" effect). Its curve slopes down toward, but never reaches, zero.
- Average variable cost (AVC) and average total cost (ATC) are U-shaped: they fall, reach a minimum, then rise. ATC lies above AVC by the amount of AFC, and the gap narrows as output rises because AFC shrinks.
- Marginal cost (MC) first falls (early gains in productivity) then rises, because of diminishing marginal returns, each extra unit eventually costs more.
How marginal cost relates to the averages
This is the same "marginal pulls the average" logic as the product curves: adding a unit that costs less than the current average drags the average down; adding one that costs more pushes it up; the average bottoms out exactly where marginal cost equals it. Because of diminishing marginal returns, marginal cost is the mirror image of marginal product: when marginal product is rising, marginal cost is falling, and vice versa.
Try this
Q1. Define average fixed cost and state what happens to it as output rises. [2 points]
- Cue. Average fixed cost is fixed cost divided by output; it falls continuously as a constant fixed cost is spread over more units.
Q2. Marginal cost is below average total cost at the current output. State whether average total cost is rising or falling. [1 point]
- Cue. Falling: while marginal cost is below average total cost, it pulls the average down.
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2018 (style)1 marksMultiple choice. The marginal cost curve intersects the average total cost and average variable cost curves at (A) their maximum points. (B) their minimum points. (C) the vertical axis. (D) the point where average fixed cost is zero. (E) the profit-maximizing output.Show worked answer →
The answer is (B). Marginal cost crosses average total cost and average variable cost at their minimum points: while marginal cost is below an average, that average falls; while marginal cost is above it, the average rises.
(A) is the opposite. (C) and (D) are unrelated. (E) is where marginal cost meets marginal revenue, not the averages.
AP 2021 (style)4 marksFree response. A firm has fixed cost of 0, 50, 130. (a) Calculate total cost at 3 units. (b) Calculate average total cost at 3 units. (c) Calculate the marginal cost of the fourth unit. (d) Explain why average fixed cost falls continuously as output rises.Show worked answer →
A four-point cost FRQ.
(a) (1 point): total cost = fixed cost + total variable cost = 80 = $140 at 3 units.
(b) (1 point): average total cost = total cost / quantity = 46.67.
(c) (1 point): marginal cost of the fourth unit = change in total (or variable) cost = 80 = $50.
(d) (1 point): average fixed cost is fixed cost divided by output; because fixed cost is constant, dividing it over more units makes average fixed cost fall continuously (spreading the overhead).
Related dot points
- Topic 3.1 The Production Function: define total, marginal, and average product, explain the law of diminishing marginal returns, and relate the product curves to one another.
A focused answer to AP Microeconomics Topic 3.1, covering the production function, total product, marginal product and average product, the law of diminishing marginal returns, and how the product curves relate to one another, with worked exam-style questions.
- Topic 3.3 Long-Run Production Costs: explain the long-run average total cost curve as an envelope of short-run curves, and identify economies of scale, diseconomies of scale, and constant returns to scale.
A focused answer to AP Microeconomics Topic 3.3, covering the long run when all inputs are variable, the long-run average total cost curve as an envelope of short-run curves, economies and diseconomies of scale, constant returns to scale, and minimum efficient scale, with worked exam-style questions.
- Topic 3.5 Profit Maximization: explain the marginal revenue equals marginal cost rule, apply it to find the profit-maximizing output, and use the average total cost curve to measure profit or loss.
A focused answer to AP Microeconomics Topic 3.5, covering the profit-maximizing rule that marginal revenue equals marginal cost, how to find the optimal output, and how to measure total profit or loss using price and average total cost, with worked exam-style questions.
- Topic 3.7 Perfect Competition: describe the characteristics of perfect competition, draw the short-run profit, loss, and break-even cases, explain the long-run zero-profit equilibrium, and show why perfect competition is efficient.
A focused answer to AP Microeconomics Topic 3.7, covering the characteristics of perfect competition, the price-taking firm's demand curve, short-run profit, loss, and break-even, the long-run zero-economic-profit equilibrium, and the allocative and productive efficiency of perfect competition, with worked exam-style questions.
- Topic 3.4 Types of Profit: distinguish accounting profit from economic profit using explicit and implicit costs, define normal profit, and explain what positive, zero, and negative economic profit signal.
A focused answer to AP Microeconomics Topic 3.4, covering accounting versus economic profit, explicit and implicit costs, normal profit, and what positive, zero, and negative economic profit signal for entry and exit, with worked exam-style questions.
Sources & how we know this
- AP Microeconomics Course and Exam Description — College Board (2023)