A firm's costs include economic and opportunity costs. Its short-run total costs include fixed and variable costs. Fixed costs do not change with output, but variable costs do. Average costs measure cost per unit, so average total cost is total cost divided by total output. Similarly, average variable cost is variable cost divided by output, and average fixed cost is fixed cost divided by output. Marginal cost is the additional total cost of producing another unit of output. In the long run, all of a firm's costs are variable. Therefore, the long-run average cost curve shows the firm's minimum per-unit cost. By examining the long-run average cost curve, it is possible to understand how the firm's per-unit costs are affected by the scale of its operations.
At A Glance
- Economic cost includes both explicit and implicit (opportunity) costs. In the short run, a firm has both fixed and variable costs.
Average cost measures the cost per unit of output, and marginal cost is the additional cost of producing an additional unit of output.
Long-run costs are completely variable. The firm will opt for the production technology that minimizes its costs.