To do

• Print off starter slide

• Print off costs table
Starter:
Explain what is meant by economic cost of production (2)
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Explain why the economic cost of production tends to be higher than the actual cost
of production (2)
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Explain what is meant by fixed costs. You must include an example in your answer (2)
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Explain what is meant by variable costs. You must include and example in your answer
(2)
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 Lesson title: Costs lesson 2

Lesson objective: What are total, average and marginal

costs?
Lesson outcomes:

To be able to recall the difference between economic costs and actual

costs
To be able to calculate total, average and marginal costs and plot
relevant graphs
To be able to explain marginal costs in the context of the law of
diminishing marginal returns
Total costs (TC)
Total costs are the cost of producing a given level of output.

Which two components are total costs made up of?

Total costs (TC) = Fixed costs (FC) + Variable costs (VC)

Total costs = FC + VC

Task:
Complete the total costs
column.

What do you notice about

total costs as output
increases?
Total costs
Total costs and increased production
Explain why total costs would increase with an increase in production
levels (2)

Remember to use key economic terminology in your answer:

-factor inputs
-variable costs
-labour
Average variable cost (AVC), average fixed costs (AFC) and average total
cost (ATC/AC)
AC = TC/Q

AVC = VC/Q

AFC = FC/Q

Task: Complete your AVC, AFC and AC columns.

Comment on what is happening to AVC, AFC and AC as
output increases
Average variable cost (AVC), average fixed costs (AFC) and average total
cost (ATC/AC)

What is happening to AVC, AFC and AC as output

increases
Marginal cost (MC)
Marginal cost is the cost of producing one additional unit of output.

For example, if it costs £100 to produce 10 units and costs £105 units to produce 11
units. The marginal cost of the 11th unit is…

£5

If it costs £4 to produce 2 units but £10 to produce 3 items, then the marginal cost of
the 3rd unit is..

£6
Marginal cost MC =
(MC) ΔTC/ΔQ

Task: Complete MC columns

Comment on what is happening to MC as output
increases
Marginal cost (MC)
Plotting costs

Plot each cost curve against the level of output.

Note: Y axis = costs X axis = output

 Section A: MCQ
Complete the shorter answer questions
The law of diminishing returns
Factor inputs in the short run vs the long run.