This document defines and explains different types of costs including fixed costs, variable costs, average costs, and marginal costs. It provides examples of fixed costs like rent and salaries. Variable costs vary with output and include raw materials. Average costs are calculated by dividing total costs by units produced. Marginal cost is the change in total cost from producing one additional unit. Cost curves can be used to show the relationship between these different cost measures.

1. Costs
Total, Fixed, Variable, Average and Marginal
ECON3

2. 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

3. 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 output
Semi 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

4. 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

5. 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.
Units Produced Total Cost Marginal Cost
0 0 -
100
1 100
100
2 200
– Remember MC is always plotted between values.

6. 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

7. 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