Question

Please define all types of costs in a production process. Give the formulas of calculation if necessary. Also, you should strengthen your answers by giving examples for each type of cost functions.

Answer 1

Fixed cost - Fixed cost refers to that cost which does change with the change ( increase or decrease) in the amount of goods or services produced or sold.

Example of fixed cost - rent , salary , etc

Variable cost - variable cost is that cost which changes with the increase or decrease in the quantity of goods or services produced.

Example of variable cost are - raw material ,electricity bill, etc

Average cost - average cost is that cost which is obtained by dividing the total cost with the total quantity or output .

Example of average cost -

Total cost of a commodity is = $100000

Total quantity produced is = 100 units

Average cost = $100000/100 = $1000

Marginal cost - marginal cost refers to when by additional unit of output there is increase or decrease in the total cost of a production that is known as marginal cost

Example of Marginal cost

Suppose production of one shirt = $50

Total cost of 2 shirt = $70

Therefore marginal cost of second shirt = $20 ($70-$50)