Cost behavior

Cost behavior is an indicator of how a cost will change in total when there is a
change in some activity. In cost accounting and managerial accounting, three types
of cost behavior are usually discussed. In other words, Cost behavior is the manner
in which expenses are impacted by changes in business activity. The reaction of
expenses to alterations in the amount of some business activity.

Different concepts of Economic costs

Explicit Costs
Explicit costs—also known as accounting costs—are easy to identify and link to a
company's business activities to which the expenses are attributed. They are
recorded in a company's general ledger and flow through to the expenses listed on
the income statement. The net income (NI) of a business reflects the residual
income that remains after all explicit costs have been paid. Explicit costs are the
only accounting costs that are necessary to calculate a profit, as they have a clear
impact on a company's bottom line. The explicit-cost metric is especially helpful
for companies' long-term strategic planning.

Implicit Costs
Implicit costs are also referred to as imputed, implied, or notional costs. These
costs aren't easy to quantify. That's because businesses don’t necessarily record
implicit costs for accounting purposes as money does not change hands.These
costs represent a loss of potential income, but not of profits. A company may
choose to include these costs as the cost of doing business since they represent
possible sources of income.

Real Costs:
Another concept of costs is the real costs. It is a philosophical concept which refers
to all those efforts and sacrifices undergone by various members of the society to
produce a commodity. Like monetary costs, real costs do not tell us anything what
lies behind these costs. Prof. Marshall has called these costs as the “Social Costs of
Production.”
Opportunity cost
It is also known as the alternative cost or transfer cost. In simple words,
opportunity cost is the cost of production of any unit of commodity for the value of
factors of production used in producing other unit or The opportunity cost of
anything is the next best alternative that could be produced instead by the same
factors or by an equivalent group of factors.

Short run cost

Total Fixed Costs (TFC):
Refer to the costs that remain fixed in the short period. These costs do not change
with the change in the level of output. For example, rents, interest, and salaries.
TFC remains constant with respect to change in the level of output.

Total Variable Costs (TVC):

Refer to costs that change with the change in the level of production. For example,
costs incurred on purchasing raw material, hiring labor, and using electricity. If the
output is zero, then the variable cost is also zero.

Total Cost (TC):

Involves the sum of TFC and TVC.

It can be calculated as follows:

Total Cost = TFC + TVC
Total fixed costs

Given that total fixed costs (TFC) are constant as output increases, the curve is a
horizontal line on the cost graph.

Total variable costs

The total variable cost (TVC) curve slopes up at an accelerating rate, reflecting
the law of diminishing marginal returns.

Total costs

The total cost (TC) curve is found by adding total fixed and total variable costs. Its
position reflects the amount of fixed costs, and its gradient reflects variable costs.
MC: It is important to note that marginal cost is derived solely from variable
costs, and not fixed costs. The marginal cost curve falls briefly at first, then rises.
Marginal costs are derived from variable costs and are subject to the principle
of variable proportions.

The marginal cost curve is significant in the theory of the firm for two reasons: It is
the leading cost curve, because changes in total and average costs are derived from
changes in marginal cost. The lowest price a firm is prepared to supply at is the
price that just covers marginal cost.

AFC: The average fixed cost (AFC) curve will slope down continuously, from
left to right.

AVC: The average variable cost (AVC) curve will at first slope down from left to
right, then reach a minimum point, and rise again.AVC is ‘U’ shaped because of
the principle of variable Proportions, which explains the three phases of the curve:
Increasing returns to the variable factors, which cause average costs to fall,
followed by: Constant returns, followed by, Diminishing returns, which cause costs
to rise.

ATC: Average total cost (ATC) can be found by adding average fixed costs (AFC)
and average variable costs (AVC). The ATC curve is also ‘U’ shaped because it
takes its shape from the AVC curve, with the upturn reflecting the onset of
diminishing returns to the variable factor. Average Cost

The Average Cost is the per unit cost of production obtained by dividing the total
cost by the total output . By per unit cost of production, we mean that all the fixed
and variable cost is taken into the consideration for calculating the average cost.
Thus, it is also called as Per Unit Total Cost.

Average firxed cost

In economics, average fixed cost (AFC) is the fixed cost per unit of output. Fixed
costs are such costs which do not vary with change in output. AFC is calculated by
dividing total fixed cost by the output level.

Averge Variable cost

The average variable cost (AVC) is the total variable cost per unit of output. This
is found by dividing total variable cost (TVC) by total output (Q). Total variable
cost (TVC) is all the costs that vary with output, such as materials and labor. The
easiest way to determine if a cost is variable is if the output changes, the cost
changes as well.

Average Total Cost

When economists, production managers, or others refer to average total cost, they
are referring to the per unit cost that includes all fixed costs and all variable costs.
Knowing average total cost is critical in making pricing decisions, as any price
below average total cost will result in a financial loss.

Marginal Cost
the marginal cost of production is the change in total production cost that comes
from making or producing one additional unit. To calculate marginal cost, divide
the change in production costs by the change in quantity. The purpose of analyzing
marginal cost is to determine at what point an organization can achieve economies
of scale to optimize production and overall operations. If the marginal cost of
producing one additional unit is lower than the per-unit price, the producer has the
potential to gain a profit