Costs are defined as money paid by a firm to obtain the factors of production. While you may understand what a cost is it is important that you are able to define the term succinctly in an exam to gain maximum credit.
Types of Cost
We split costs in to fixed costs which do not vary with output in the short run and variable costs which do vary with output. Fixed costs include things like rent. A shop or factory must rent a building to operate from and will need to pay for it even if they do not produce anything this month. Obviously if in the long run the firm wants to expand its production significantly then it may need to pay more to rent a larger building but this will not happen in the short run. Variable costs pay for things like raw materials. As these are used up in making the product these must be paid for each time and so do vary with output.
Sometimes people refer to semi-fixed costs. These are costs like electricity which may have a fixed element such as line rental and a variable element such as calls, which will increase as the business produces more.
Calculating Costs
There are a number of costs you need to be able to calculate:
Using these formulae and the reminders at the top of the columns you should be able to calculate every cost in the table
|
Output |
Fixed Cost |
Variable Costs |
Total Cost (FC+VC) |
Average Cost (TC/Q) |
Marginal Cost DTC |
|
0 |
1000 |
|
1000 |
|
|
|
1 |
|
200 |
1200 |
|
|
|
2 |
|
340 |
|
|
|
|
3 |
|
440 |
|
|
|
|
4 |
|
540 |
|
|
|
|
5 |
|
675 |
|
|
|
|
6 |
|
|
|
310 |
|
|
7 |
|
|
|
300 |
|
|
8 |
|
|
2400 |
|
|
|
9 |
|
1790 |
|
|
|
|
10 |
|
|
3300 |
|
|
|
11 |
|
2960 |
|
|
|
|
12 |
|
|
|
400 |
|
Hint: if you are struggling try starting with fixed costs (they don't change) and then fill in as many variable and total costs as you can.
Drawing Costs
As well as being able to calcuate costs you must also be able to sketch what they look like on a graph and explain the reason for the shape.
