Production Costs
Short-run cost curves, marginal cost, ATC, and AVC.
What this graph shows
This sandbox draws a firm's short-run per-unit cost curves: marginal cost (MC, red), average total cost (ATC, blue), average variable cost (AVC, green), and average fixed cost (AFC, gray). MC, ATC, and AVC are U-shaped because of diminishing marginal returns, while AFC falls continuously toward zero as fixed cost spreads over more units. The sliders let you change fixed cost, the wage paid to labor, productivity, and the quantity produced, then watch every curve redraw.
The shape and spacing of these curves encode two rules students are tested on constantly. MC cuts through the lowest point of both AVC and ATC, and the vertical distance between ATC and AVC is exactly AFC, so the two curves squeeze closer as output rises. The graph marks the minimum of AVC (the shutdown point) and the minimum of ATC (the break-even point), the price thresholds a competitive firm uses to decide whether to keep operating.
How to read it
Quantity is on the horizontal axis and cost per unit in dollars on the vertical. Read any curve at a chosen output by finding its height there; the movable vertical line's dots mark MC, ATC, and AVC at that quantity, with all four values (including AFC) shown as exact numbers in the panel below. The green and blue dots mark the minimum points of AVC and ATC, where MC crosses each from below. Because AFC is the gap between ATC and AVC, watch that gap shrink as you move right, which is why the two average curves converge but never touch.
Three things to try
- Drag the Fixed Cost slider up and confirm that only ATC and AFC shift upward while MC and AVC stay put, since fixed costs do not change the cost of producing one more unit.
- Raise the Labor Cost (wage) slider and watch MC, AVC, and ATC all climb together, because higher variable input prices raise both marginal and average variable cost.
- Slide the Production Level line across the graph and stop where the red MC dot passes through the bottom of the green AVC curve, confirming that MC intersects AVC precisely at its minimum (the shutdown point).
Common questions
Why does the marginal cost curve cross ATC and AVC at their minimum points?
Whenever marginal cost is below an average, it pulls that average down, and whenever it is above, it pushes the average up. The average therefore stops falling and starts rising exactly where MC equals it, which is the minimum of the U-shaped curve.
Why does AFC keep falling and never turn back up?
Average fixed cost is total fixed cost divided by quantity. Fixed cost is a constant, so dividing it over ever more units always produces a smaller number. AFC approaches zero but never becomes negative or rises, which is why it has no U shape.
What is the difference between the shutdown point and the break-even point?
The shutdown point is the minimum of AVC: below that price a firm cannot even cover its variable costs and should stop producing in the short run. The break-even point is the minimum of ATC: above that price the firm earns positive economic profit.
Production Costs: key terms
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