CONCEPT OF TOTAL, AVERAGE AND MARGINAL COST
Fixed cost may be defined as the cost of a firm which do not vary or change with every change of output. For example once a firm has built its factory and all the required machinery have been installed, the fixed costs remain the same whether the firm is working in full capacity or not. In some form of production , fixed cost forms a very high cost of total cost , in other firms the fixed cost forms only a small proportion of total cost. Fixed costs are those cost that do not change with output ,they will remain no matter the amount of the output full-stop fixed costs are also referred to as overhead cost or unavoidable costs for example which cost include cost of machinery land rent interest on loan depreciation charges etc. It can be expressed mathematically as.
FC = TC - VC
Variable costs are direct cost which change in the short run with the scale of production. If the volume of output is increased variable cost will increase full-stop variable cost vary in direct proportion to the level of output of a firm. Variable cost include money spent on purchasing raw materials and powerful stuff for example in order to produce more goods more raw materials will be required and therefore the cost of acquiring them will increase full-stop variable cost are sometimes called direct cost. Prime cost is the same as variable cost except that it includes cost of administration. It can be expressed mathematically as
VC = TC - FC
Total cost is the overall expenditure involved in producing a given quantity of a commodity it is the sum of both variable cost and fixed cost. It is also derived by multiplying the unit cost of production by the total quantity of a commodity produced for example if the cost of producing a shirt is $10 and 30 units are produced the total cost is $300. It can be expressed mathematically as
TC =AC × Q
TC = VC +FC
Average cost can be defined as a cost per unit of output or the total cost of producing a product incure by a firm divided by the number of its units of output . Average cost may be divided into average fixed cost and average variable cost. We can obtain average cost by dividing the total cost by the total number of output produced. It can be expressed mathematically as AFC=TFC/Q
Marginal cost is the additional cost incurred by producing an additional unit of a commodity or reduction in the total cost arising from the reduction or total production by one unit for example if the total cost of producing 20 bottle of Fanta is $18 and the total cost of producing 21 bottles of Fanta is $19 The marginal cost is $1 . Marginal cost is also known as incremental cost. The marginal fixed cost is always zero since fixed cost do not vary with output.. it can be expressed mathematically as
MC = ∆TC/∆Q
AVERAGE VARIABLE COST
This is the variable cost or total variable cost divided by the total number of output. For example if the variable cost of production is 500 naira and 500 units of commodity are produced, the average variable cost is 1 naira.
AVERAGE FIXED COST
It is a cost that decline continuously as Output increases. For instance if the output is double it will lead to the average fixed cost reducing to have five units of output. It can be expressed as AFC = FC/Q
AFC = TFC/Q
TOTAL FIXED COST
It is the same as fixed cost. It is the total expenditure on overheads.It can be expressed as TFC=ATC×QTotal variable cost:this is the same as variable cost. It is the total expenditure incurred on such thing as raw materials and food cost increases with the increased level of production. It can be expressed as TVC = AVC × Q
RELATIONSHIP BETWEEN, TOTAL, AVERAGE AND MARGINAL COST.
- The average cost is derived from total cost by dividing the total cost by the total output.
- Total cost is the sum of all average cost.
- The marginal cost is the difference between two consecutive total cost.
- Marginal cost is equal to average cost when the average cost is at its lowest point, the marginal cost curve cut the average cost curve from below at its lowest point when the average cost is falling the marginal cost is below it while the marginal cost is above is when the average call start risingthe average fixed cost curve falls as output increases because the fixed cost is spread over a larger output level.
- The u-shaped nature of the marginal and average cost curves show that as the level of output increases both cost decrease up to a point. This is due to economies of scale. As output increases for the diseconomies may set in leading to higher marginal and average cost.