- Total cost
In
economics , andcost accounting , total cost (or total costs) describes the totaleconomic cost of production and is made up of variable costs, which vary according to quantity produced such as raw materials, plus fixed costs, which are independent of quantity produced such as expenses forasset s like buildings.The rate at which total cost changes as the amount produced changes is called
marginal cost ; this is the marginal unit variable cost. If one assumes that the unit variable cost is constant, as incost-volume-profit analysis , then total cost is linear in volume, and given by TC = FC + unit VC * N.Terms
Marginal CostMarginal cost is the additional cost we have when we produce one more unit of the good. With the equation TC = 50 + 6Q, our total cost goes up by 6 whenever we add an additional good, as shown by the coefficient in front of the Q. So we have a constant marginal cost of 6 per unit produced.
Total CostWe already have a formulation for the total cost, which is TC = 50 + 6Q.If we want to calculate the total cost for a specific quantity, all we need to do is substitute the quantity in for Q. So the total cost of producing 10 units is 50 + 6*10 = 110.
Fixed CostOur fixed cost is the costs we incur when we do not produce any units. So we substitute in Q = 0 to our equation and we get 50 + 6*0 = 50. So our fixed cost is 50.
Total Variable CostsThese are the non-fixed costs we incur when we produce Q units. So our variable costs are:
Total Variable Costs = Total Costs – Fixed Costs.
In our case that would be 50 +6Q – 50 = 6Q. So our total variable costs are 6Q, and we can calculate our total variable costs at a given point by substituting for Q.
Average Total CostsWe are averaging our total costs over the number of units we produce. So we take our total cost formula of TC = 50 + 6Q, and divide the right hand side to get average total costs. So our average total costs are AC = 50/Q + 6Q/Q = 50/Q + 6. To get our average total cost at a specific point we just substitute for the Q. So our average total cost of producing 5 units is 50/5 + 6 = 10 + 6 = 16.
Average Fixed CostsSimilarly, we just divide our fixed costs by the number of units we produce. Since our fixed costs are 50, our average fixed costs are 50/Q.
Average Variable CostsAs you may have guessed, to calculate our average variable costs we divide our variable costs by Q. Since our variable costs are 6Q, our average variable costs are 6. Notice that our average variable cost does not depend on our quantity produced and is the same as our marginal cost. This is one of the special features of the linear model, but will not hold when we use a non-linear formulation.
ee also
*
Fixed cost
*Variable cost
*Semi variable cost
*Cost-Volume-Profit Analysis
*Cost accounting
Wikimedia Foundation. 2010.
