Costs for a firm
Firms have a number of different types of costs including fixed cost, variable cost, total cost and marginal cost. All of these different costs need to be considered when looking to figure out the costs to a firm. Figure 1 shows how the individual costs change with the level of output of a firm, check a cost column from the table (at the bottom of the page) and compare with the corresponding line on the graph to see what each cost does with increased output.[2] Of course, the more units produced, the more units can be sold. This means that the average costs should be considered. As seen in figure 2, the fixed costs for production drop with more units produced, while the variable and total costs have a slightly more complicated relationship. Both figure 1 and figure 2 come from the data in the table below.
- Fixed Cost: The cost that is incurred regardless of the number of units produced. Note that the fixed costs have to be paid, even with no production.
- Variable Cost: The cost that accounts for the cost of production, excluding what is covered in the fixed costs.
- Total Cost: The fixed plus variable costs.
Within these costs are other types of cost as well:
- Accounting Cost: This is the operation cost of running a business combined with the cost of inputs such as raw materials, labour and rent.[3]
- Opportunity Cost: This is the cost of using an input to do one thing instead of another of thing of value.[4] For example a petrochemical company might have a reserve of crude oil that they keep to cope with spikes in demand or short falls in supply. The opportunity cost of holding the crude oil out of the market is the value that the oil could be sold to another firm for.
- Economic Cost: This cost is the accounting costs of a firm combined with its opportunity cost.[5]
This table shows how the various costs interact for a hypothetical firm.
Output Quantity |
Fixed Cost FC |
Variable Cost VC |
Total Cost TC |
Marginal Cost MC |
Average Fixed Cost AFC |
Average Variable Cost AVC |
Average Total Cost ATC |
---|---|---|---|---|---|---|---|
0 | 50 | 0 | 50 | - | - | - | - |
1 | 50 | 10 | 60 | 10 | 50 | 10 | 60 |
2 | 50 | 17.5 | 67.5 | 7.5 | 25 | 8.75 | 33.75 |
3 | 50 | 22.5 | 72.5 | 5 | 16.67 | 7.5 | 24.17 |
4 | 50 | 25 | 75 | 2.5 | 12.5 | 6.25 | 18.75 |
5 | 50 | 30 | 80 | 5 | 10 | 6 | 16 |
6 | 50 | 37.5 | 87.5 | 7.5 | 8.33 | 6.25 | 14.58 |
7 | 50 | 47.5 | 97.5 | 10 | 7.14 | 6.79 | 13.93 |
8 | 50 | 60 | 110 | 12.5 | 6.25 | 7.5 | 13.75 |
9 | 50 | 75 | 125 | 15 | 5.56 | 8.33 | 13.89 |
10 | 50 | 100 | 150 | 25 | 5 | 10 | 15 |
11 | 50 | 150 | 200 | 50 | 4.55 | 13.64 | 18.18 |
12 | 50 | 225 | 275 | 75 | 4.17 | 18.75 | 22.92 |
See Also
references
- ↑ 1.0 1.1 Graph made by a member of the energy education team.
- ↑ A. Goolsbee, S. Levitt and C. Syverson. ‘’Microeconomics’’. New York: Worth Publishers, 2013, pp. 275.
- ↑ D. Rutherford. Routlege Dictionary of Economics. London: Routlege, 1995, pp.4.
- ↑ J.Black, N. Hashimzade, and G. Myles. (2009) "Utility." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-2203?rskey=9WO35j&result=1, 2009 [May 29, 2016]
- ↑ Investopedia. "Economic Profit (or loss)." [Online], Available: http://www.investopedia.com/terms/e/economicprofit.asp [Aug 17, 2016].
- ↑ A. Goolsbee, S. Levitt and C. Syverson. ‘’Microeconomics’’. pp. 273.