The total cost function assumes that there are fixed costs (FC) equal to $250 and variable costs that arise from the use of the variable factor of production. To simplify the analysis, capital (K) is thought to be the fixed factor and labor (L) is the variable factor of production.

The fixed costs (FC) of $250 are associated with the plant and equipment of the firm and this factor, capital (K), remains unchanged in the short run.

The usage of the variable factor labor (L) is primary determinant of the shape of the variable cost (VC) function.

The use of labor (L) is subject to the law of diminishing marginal productivity.

The total cost (TC) function first shows costs increase at an decreasing rate, then at some level of output, costs begin to rise at an increasing rate.

Unit Cost: Marginal Cost (MC) and Average Cost (AC)
The two unit cost measures that may be determined in this graph are marginal cost (MC) and average cost (MC). Marginal cost is the slope of a segment that is tangent to the TC function at a point on the curve corresponding to that level of output. Average cost (AC) is the slope of a ray emenating from the origin that intersects the TC at a point corresponding to a given level of output. Click on the graph for more narrative about unit costs at a given level of output, including both MC and AC.