Costs of Production Prepared by Sandrea Butcher

Fixed Costs

What are fixed costs?

• These costs do not change with output.• If the firm does not produce any output it

will still have to pay these costs.

• If you own a bakery in an industrial estate, and you do not bake bread for a month because you are on vacation you still have to pay rent.

Other examples

• Insurance

• Loan payments

• Salaries of managers

Variable Costs

What are variable costs?

• These costs vary in direct proportion to output.

• When output increases so do these cost.

Examples• Commissions

• Packaging

Total Cost

• The sum of fixed and variable costs is called total costs.

• If total fixed costs are $3560 and total variable costs are $14729 then,

Total cost = $3,560 + $14,729= $18,289

Average Costs (or Per unit Costs)

Average Fixed Cost

• This is the fixed cost per unit of output.• It is calculated as:Average Fixed Cost = • The formula may also be written asAverage Fixed Cost =

Average Variable Cost

• This is the variable cost per unit of output.• It is calculated as:Average Variable Cost = • The formula may also be written asAverage Variable Cost =

Average Total Cost

• This the cost of producing each unit.• It is calculated as:Average Cost = • The formula may also be written asAverage Cost =

Firm B has higher total cost, but lower average (total)

cost

• Firm A produces 30 units and total cost is $660.

• Average cost = = $22

• Firm B produces 1005 units and total cost is $19,095

• Average cost = = $19

Another way to calculate Average Total Cost

• Total Cost = Total Variable Cost+ Total Fixed Cost

• It means that:• ATC = AFC + AVC

Marginal Costs

• This is the change in total cost of producing each additional unit of output.

• It is calculated as:Marginal Cost = • The formula may also be written as:Marginal Cost = Where means “the change in”