What is Cost ? Average Cost , Total Cost , Marginal Cost , Variable Cost ? Microeconomics Graduation - Economics - getEducatn

WHAT IS COST ? AVERAGE COST , VARIABLE COST , MARGINAL COST ? 

Everywhere that production goes, costs follow close behind like a shadow. Firms must pay for their inputs: screws, solvents, software, sponges, secretaries, and

statisticians. Profitable businesses are acutely aware of this simple fact as they determine their production strategies, since every dollar of unnecessary costs

reduces the firm’s profi ts by that same dollar.

TOTAL COST: FIXED AND VARIABLE

Consider a fi rm that produces a quantity of output (denoted by q) using inputs of capital, labor, and materials. The fi rm’s accountants have the task of cal-

culating the total dollar costs incurred to produce output level q .

Total cost represents the lowest total dollar expense needed to produce each level of output q . TC rises as q rises.

Fixed costrepresents the total dollar expense that is paid out even when no output is produced; fixed cost is unaffected by any variation in the quan-

tity of output.

Variable cost : represents expenses that vary with the level of output—such as raw materials, wages, and fuel—and includes all costs that are not fixed.

 Always, by definition,

TC=FC+VC

where ,TC - total cost 

FC - fixed cost 

VC - variable cost 

DEFINITION OF MARGINAL COST

Marginal cost is one of the most important concepts in all of economics. Marginal cost ( MC ) denotes the extra or additional cost of producing 1 extra unit of output. Say a firm is producing 1000 compact

discs for a total cost of $10,000. If the total cost of the TC of the subsequent quantity. Thus the MC of the first unit is $30(=$85 - $55); the marginal cost of the second unit is $25(= $110 - $85); and

so on.

The marginal cost of production is the additional cost incurred in producing 1 extra unit of output.