Cost Analysis

Paolo Augustus R. Bagares

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Types of costs

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Total Cost (TC)
sum total of all production costs related to a
particular output level
Total Fixed Costs + Total Variable Costs

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Total Fixed Costs (TFC)
refers to costs that stay relatively the same in the
short-run (e.g. rent, depreciation, interest on loans)
calculated by multiplying the fixed cost per unit to
the total output
in the short-run TFC remains the same at all levels
of output

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Total Variable Costs (TVC)
costs that vary along with the level of production
costs tied directly with producing (e.g. raw materials,
direct labor)
calculated by multiplying variable cost per unit to the
total output

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Average Fixed Costs (AFC)
Total fixed costs (TFC) divided by total output (Q)
AFC = TFC / Q

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Average Variable Costs (AVC)
Total variable costs (TVC) divided by total output
(Q)
AVC = TVC / Q

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Average Total Costs
Total costs (TC) divided by total output (Q)
ATC = TC / Q

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Marginal Cost
refers to the incremental cost involved in having to
produce one more unit
in the short run, this could equate to the variable
cost per unit
it can also be derived through the following:
MC = dTC / dQ

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Marginal Cost Example

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Short Run Total Cost Schedule

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Analysis
TFC remains constant at all levels of output
TVC varies with the output but does not
change in the same proportion
TC varies in the same proportion as TVC

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Interpretation

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Average Fixed Cost Curve
has a hyperbola shape indicating that as more is
produced the cost of production is spread

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Average Variable Cost Curve
is U-shaped indicating that it initially decreases as
more is produced then increases
this is in part due to not having enough fixed costs

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Average Total Cost Curve
has a similar shape to AVC since it’s composed
primarily of TFC and TVC

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Marginal Cost Curve
has a steep U-shape curve, indicating that as it
decreases intitially but increases after some point
this is the law of diminishing marginal returns at play

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Linear Cost function

TC = a + bQ
where
a = fixed cost
b = slope of the cost function
Q = quantity
bQ = variable cost

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