behind them, will not change.

Lessons from Alternative Measures of Costs

Breaking down total costs into fixed cost, marginal cost, average total cost, and average variable cost is useful

because each statistic offers its own insights for the firm.

Whatever the firm’s quantity of production, total revenue must exceed total costs if it is to earn a profit. As

explored in the chapter Choice in a World of Scarcity, fixed costs are often sunk costs that a firm cannot

recoup. In thinking about what to do next, typically you should ignore sunk costs, since you have already spent

this money and cannot make any changes. However, you can change variable costs, so they convey information

about the firm’s ability to cut costs in the present and the extent to which costs will increase if production rises.

CLEAR IT UP
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