Total economic cost of production consisting of
fixed and variables costs.
Fixed Costs = Costs that don’t change based on production.
Variable Costs = Costs that change with rate of production
example: cost of raw materials.
Total Costs = Fixed Costs + Variable Costs.
Different types of Cost:
Economic Cost: The cost of production which take into
account both Explicit cost and Implicit cost can be
considered as Economic cost.
Economic cost = Explicit cost + Implicit cost.
Explicit Cost: Money payments that a firm makes to the
outsiders who supply inputs. These are “out of pocket”
costs e.g. salaries, price paid for raw materials etc. It is
also known as accounting cost.
Implicit Cost: The cost of “self owned” resources which
are employed by the firm and are non-expenditure costs
e.g. salary of proprietor etc. It is also known as
Marginal Cost: The addition to cost associated with one
additional unit of output.
MC = Change in TC/Change in Q.
Average Total Cost: Total Cost/Output, the cost per
unit of production.
ATC = TC/Q.
Average Variable Cost: Total Variable Cost/Output, the
average variable cost per unit of production.
Average Fixed Cost: Total Fixed Cost/Output, the
average fixed cost per unit of production.
AFC = TFC/Q.
Figure of Marginal Cost, Average Total Cost,
Average Variable Cost, and Average Fixed Cost.
Different types of Revenue:
Total Revenue: Total earnings from sales over a certain
period of time.
TR = P*Q.
Average Revenue: Revenue generated by per unit sold.
AR = TR/Q.
Marginal Revenue: Change in revenue when output
changes by one unit.
MR = Change in TR/Change in Q.
Figure of Total Revenue, Average Revenue
and Marginal Revenue.
P* AR P*=Marginal Revenue