Supply: Production, Costs, and Profits - Essay Example

Average fixed cost: This cost is computed by dividing the total fixed cost by the quantity of goods produced by a firm. The formula for calculating Average Fixed cost is AFC=TFC/Q where Q is the quantity and TFC is Total Fixed Cost. Average Variable Cost: This is calculated by dividing the total variable cost by the quantity of goods produced by a firm. The formula for calculating Average Variable Cost is AVC=TVC/Q where Q is the quantity and TVC is Total Variable Cost. Average Total cost: This is calculated by dividing the total cost by the quantity of goods produced.

The formula for calculating Average Total cost is ATC=TC/Q where TC is Total cost and Q is quantity. If, in a business firm, the prices levels are equal or greater than the average cost, the business will continue operating in the short run even if the fixed and variable cost are not entirely paid out. In brief, the firm continues to operate even though it is running at an economic loss. The reason behind this is that the fixed cost is paid out whether the firm produces goods or does not produce.

The rationale is that it is better to have enough returns in order to cover a portion of the fixed cost than to get nothing at all (Sexton, 2011). This law states that the marginal cost decreases at some point as additional units of a fixed variable factor are added to the fixed factor. The law of diminishing returns is a principle that operates on short run as opposed to the long run. This law is applicable to agricultural and non-agricultural products. The relationship between the changes in the labor and the total output is referred to marginal cost.

Marginal cost is any increase in the total output, which is produced by adding one unit of variable input to a fixed input. The figure below represents a short- run production for Eaglecrest Vineyard. The number of workers per day is the variable input. The factors of