Costs

Vocabulary

average cost

cost per unit of output

average fixed cost (AFC)

fixed cost divided by the quantity of output
AFC=FCQ\text{AFC}=\frac{\text{FC}}{\text{Q}}

average total cost (ATC)

total cost divided by the quantity of output; the sum of average fixed and average variable costs
ATC=TCQ\text{ATC}=\frac{\text{TC}}{\text{Q}}
ATC=AFC+AVC\text{ATC}=\text{AFC}+\text{AVC}

average variable cost (AVC)

variable cost divided by the quantity of output
AVC=VCQ\text{AVC}=\frac{\text{VC}}{\text{Q}}

constant returns to scale

occurs when long-run average total cost remains the same as output increases

diseconomies of scale

occurs when long-run average total cost rises as output rises

economic cost

the sum of explicit and implicit (opportunity) costs

economies of scale

occurs when long-run average total cost falls as output rises

explicit cost

a cost involving monetary payment

fixed cost (FC)

the cost of fixed inputs; does not change as output changes

implicit cost

a cost that does not require the buyer to pay cash, or that cannot easily be assigned a monetary value

law of diminishing marginal returns

the observation in the short run that each additional unit of a production input, holding all other inputs fixed, will yield progressively smaller increases in output

long-run average total cost (LATC)

the minimum per-unit cost of producing any level of output when all inputs are variable

long-run total cost

the minimum cost of producing any level of output when all inputs are variable

marginal cost (MC)

the additional cost that a firm incurs by producing an additional unit of output, which must be covered in order to remain operational in the short run
MC=ΔTCΔQ\text{MC} = \frac{\Delta \text{TC}}{\Delta \text{Q}}

short run

the period in which at least one productive input is fixed

total cost (TC)

the sum of a firm's fixed and variable costs

variable cost (VC)

the cost of variable inputs; changes as output changes