Total Cost (TC) describes the total economic cost of production. It is composed of variable, and fixed, and opportunity costs.
- Fixed costs
- The accounting costs which do not change based on your level of output
- Always determined to be fixed in the short term; if you could not change it on short notice it is fixed
- EXAMPLE building costs, insurance, property taxes
- Variable costs
- The accounting costs that do change based on your output level
- Always determined in the short run (all factors are variable in the long run); if you could change it on short notice it is variable
- EXAMPLE number of widgets produced, number of low skilled employees, packaging costs
- Opportunity Costs
- All of the other things that you could be doing with your money if you were not doing what you are doing
- Not normally accounted for in accounting costs
- EXAMPLE amount of interest you would earn on an investment, salary you could earn being employed elsewhere
- Total Cost = Total Fixed Cost + Total Variable Cost + Opportunity Cost
- Average cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable cost divided by Q) plus average fixed costs (total fixed costs divided by Q). Average costs may be dependent on the time period considered (increasing production may be expensive or impossible in the short term, for example). Average costs affect the supply curve and are a fundamental component of supply and demand.
- Here is a a standard formulaic expression representing Average Costs:
- AC = TC / Q
- Marginal cost is the change in total costs that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. Mathematically, the marginal cost (MC) function is expressed as the first derivative of the total costs (TC) function with respect to quantity (Q). The marginal cost may change with volume, and so at each level of production, the marginal cost is the cost of the next unit produced.
- Here is a a standard formulaic expression representing Total Cost:
- MC = dTC / dQ