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Measures of Cost in Microeconomics Theory

In microeconomics the concept of cost varies significantly depending on their economic purpose. A clear distinction between the cost of their role in reproduction is the defining moment in the theory and practice.

Costs are spent or lost material, labor and financial resources in the process of business operation of the enterprise. There are many types of costs, since management and production units need very different cost information, grouped in different ways. Using a system of classification of costs allows to analyze and forecast sales figures and net income for organization as a whole, and for individual types of products, by customers and vendors, and other categories. Such types of costs are used in the operational management, profit planning and evaluation of performance and cost control. All this information is objectively necessary for operational managers and accountants. In order to better understand the measures of costs, it is necessary to make a classification.

It is possible to define such types of costs:

  • Total cost (TC) – the sum of total fixed and total variable cost at each output level. TC = FC+VC
  • Total Variable Costs (TVC) are costs that do change when the level of production rises. Total Variable Costs = Total Costs – Fixed Costs.
  • Marginal cost (MC) – the change in total cost that results from a one-unit change in output.
  • Average fixed cost (AFC) – total fixed cost divided by the amount of output. Average Fixed Cost = Fixed Costs / Number of Units
  • Average variable cost (AVC) – total variable cost divided by the amount of output. Average Variable Cost = Total Variable Costs / Number of Units
  • Average total cost (ATC) – total cost divided by the output. Average Total Cost = Total Cost of Production / Number of unitsof production

It is necessary point the relationship between marginal and average costs: first, when marginal cost is below average (total or variable) cost, average cost will decline; second, When marginal cost is above average cost, average cost rises; third, when average cost is at a minimum, marginal cost is equal to average cost.
Another important for planning and control is the classification of costs depending on changes in production or on the level of business activity of the company. Increase or decrease in output causes a corresponding increase or decrease in certain costs. However, other costs remain unchanged. Variable are called costs, which vary with changes in activities. These costs may depend on the duration of labor, type and class of service, the cost of food, as well as the cost of hotel services, the number of tourists, etc.

Fixed costs are relatively stable costs (modified slightly) while fluctuations in production volumes, services (for example, depreciation, rents, etc.).
References:

Dwivedi. (2002). Microeconomics: Theory And Applications. Pearson Education India
Tewari D.D. (2003). Principles Of Microeconomics. New Age International