Costs

7
Costs Total, Fixed, Variable, Average and Marginal ECON3

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Costs Experienced by the Firm for AQA ECON3

Transcript of Costs

Page 1: Costs

Costs

Total, Fixed, Variable, Average and Marginal

ECON3

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Page 2: Costs

Fixed Costs (FC)

• ‘A cost which is independent of output in the short run’

• This can include Rent on a Premises– In the short run this has to be paid no matter what so is

seen as fixed– In the long run the firm may close so rent doesn’t have

to be paid, so is then variable.

• They are costs which need to be paid even if production is zero.

• Fixed Costs can include:– Salaries of Permanent Employees– Costs of Machinery– Depreciation

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Page 3: Costs

Variable Costs (VC)

• ‘A cost which is related to output produced in the short run’

• These vary directly with output• An increase in output will require more raw

materials so this cost is directly linked to outputSemi Variable Costs• Costs which have both a fixed element and a

variable one• They vary with output but not proportionately• E.g. you will use a telephone if you produce more,

but not twice as much if you produce twice as much

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Page 4: Costs

Average Costs (AC)

• 3 Types– Average Fixed Costs (AFC)• Found by dividing the total fixed costs by the number of units

produced

– Average Variable Costs (AVC)• Found by dividing the total variable costs by the number of

units produced

– Average Total Cost (ATC)• Found by dividing the total costs of a firm by the number of

units produced

• Each one of these can be plotted on a graph

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Page 5: Costs

Marginal Costs (MC)

• ‘The addition to total cost from producing an extra unit of output’

• It is calculated by:– Taking the total cost (TC) and subtracting it from the TC

of the previous unit.

– Remember MC is always plotted between values.

Units Produced Total Cost Marginal Cost

0 0 -

100

1 100

100

2 200

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Page 6: Costs

Cost Curves

MC intersects the ATC curve at its lowest point

It is more common to see the graph drawn with only MC and ATC, which is normally labelled just AC

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Page 7: Costs

Definitions

• Total Costs: Are all costs of production of a product – includes fixed and variable costs

• Fixed Costs: A cost which is independent of output in the short run

• Variable Costs: A cost which is related to output produced in the short run

• Average Cost: The cost per unit• Marginal Cost: The addition to total cost from

producing an extra unit of output

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