Economic Analysis of Costs
Economics Revision Article Series
Various Types of Costs
Total cost is categorised into fixed and variable cost.
Fixed cost is paid independently of the level of output in period.
Variable costs vary with the units of production
Marginal cost denotes the extra cost of producing one extra unit of output of a product.
Average cost is total cost divided by total number of units produced.
Cost curves are U-shaped. Initially as inputs are increased there is an increasing returns to scale and average cost comes down and after certain level decreasing returns to scale sets in and average cost starts going up.
Firms would rationally aim at the minimum average cost point.
Opportunity Cost:The opportunity cost of a decision consists of the things that are given up by making that particular decision rather than the best alternative in the remaining set of opportunities to utilise the inputs.
Paul Samuelson and William D. Nordhaus, Economics, 13th Edition, McGraw-Hill, 1989
Index of articles on Cost Accounting, Costing and Cost Management