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ETAR
4B6
1. Economic Cost
Focuses on the gains and losses of one course of action versus another. It works in terms of time,
money, as well as resources. Its difference with accounting cost, is that it includes opportunity cost and
not just the amount of money spent.
Explicit costs are are out-of-pocket costs for a firm. Examples of these are payments for wages and
salaries, rent, or materials. Implicit costs on the other hand, are the opportunity cost of resources that
are owned by a firm and are used in business. An example would be expanding a factory onto land
already owned.
In economics, long run stands for the period of time in which all factors of production and costs are
variable. Short run on the other hand, is the time horizon over which factors of production are fixed,
except for labor, which stays as a variable. Firms in the long run may be able to adjust all costs, while for
short run, firms may only be able to influence prices through adjustments for production levels.
The opposite of variable resource is fixed plant. Short run is the time period, when at least one of the
factors of production is fixed and the other are variable, while variable plants are factors of production
that can be changed during that time period. In short-run the only variable factor is usually labor. In
long-run also capital and land are variable factors.
Total product is the total amount produced per a set of resources, marginal product is the cost for the
very next unit to be produced in resources, and average product is the average cost per unit produced
per set of resources.
7. Variable Cost
A variable cost is a company's cost that is associated with the amount of goods or services it produces. A
company's variable cost increases and decreases with its production volume.
8. Fixed Cost
A fixed cost is the other cost incurred by businesses and corporations. Unlike the variable cost, a
company's fixed cost does not vary with the volume of production.
9. Total Cost
It is the total expenses (cost) incurred, both explicit and implicit, on the resources to obtain a certain
level of output.
In economics, there are 3 stages of production. These stages in which the products move from raw
material to the final output are referred to as the production processes. Theses processes apply on all
types of manufacturing whether they relate to production of goods, clothes, equipments or other. The
first stage is the period of most growth in a company's production. The second stage is is the period
where marginal returns start to decrease. The third stage is where marginal returns start to become
negative.
It is the fixed cost per unit of output. Fixed costs are such costs which do not vary with change in output.
It may be only relevant in short-runs.
Formula: Average fixed cost (AFC) = Total fixed cost (FC) ÷ Output (Q)
The average variable cost (AVC) is the total variable cost per unit of output.
Formula: Average variable cost (AVC) = Total variable cost (TVC) ÷ Total output (Q).
13. Average total cost
Average total cost is all the costs that vary with output, such as materials and labor. It is also equal to
the sum of average variable costs (total variable costs divided by Q) and average fixed costs (total fixed
costs divided by Q).
It is the change in the total cost that arises when the quantity produced is incremented by one unit; that
is, it is the cost of producing one more unit of a good.