Economic cost

Aspects of economic costs

• Variable cost: Variable costs are the costs paid to the variable input. Inputs include labor, capital, materials, power and land and buildings. Variable inputs are inputs whose use vary with output. Conventionally the variable input is assumed to be labor.
  • Total variable cost (TVC) is the same as variable costs.
• Fixed cost (TFC) are the costs of the fixed assets those that do not vary with production.
  • Total fixed cost (TFC)
• Average cost (AC) are total costs divided by output. AC = TFC/q + TVC/q
  • Average fixed cost (AFC) is equal to total fixed cost divided by output i.e. AFC = TFC/q. The average fixed cost function continuously declines as production increases.
  • Average variable cost (A.V.C) = variable costs divided by output. AVC =TVC/q. The average variable cost curve is typically U-shaped. It lies below the average cost curve and generally has the same shape - the vertical distance between the average cost curve and average variable cost curve equals average fixed costs. The curve normally starts to the right of the y axis because with zero production
• Marginal cost (MC): Marginal cost is obtained from the additional cost that results from increasing output by one unit. It is the additional cost per additional unit of output.

• Cost curves: It is the graphical presentation of the costs of production as a function of total quantity produced