Cost Analysis

What is TOTAL COST (TC) ? 

Total cost is the sum of fixed cost and variable cost incurred at each level of output. Total cost of production of a firm equals its fixed cost plus its:

TC = TFC + TVC

Where:

TC = Total cost.

TFC = Total fixed cost.

TVC = Total variable cost.

Understanding AVERAGE FIXED COST (AFC)

Average fixed cost refers to fixed cost per unit of output. Average fixed Cost is found out by dividing the total fixed cost by the corresponding output.

For instance, if the total fixed cost of a shoes factory is $5,000 and it produces 500 pairs of shoes, then the average fixed cost is equal to $10 per unit. If it produces 1,000 pairs of shoes, the average fixed cost is $5 and if the total output is 5,000 pairs of shoes, then the average fixed cost is $1 pair of shoe.

From the above example, it is clear, that the fixed cost, i.e., $5,000 remains the same whether the output is 1,000 or 5,000 units.

AVERAGE VARIABLE COST (AVC) 

Average variable cost refers to the variable expenses per unit of output Average variable cost is obtained by dividing the total variable cost by the total output.

For instance, the total variable cost for producing 100 meters of cloth is $800, the average variable cost will be $8 per meter.

AVERAGE TOTAL COST (ATC)

Average total cost refers to cost (both fixed and variable) per unit of output. Average total cost is obtained by dividing the total cost by the total number of commodities produced by the firm or when the total sum of average variable cost and average fixed cost is added together, it becomes equal to average total cost.

MARGINAL COST (MC):

Marginal Cost is an increase in total cost that results from a one unit increase in output. It is defined as the cost that results from a one unit change in the production rate.

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