costs-of-production

Different Types of Costs

• In preparing goods/services for sale, firms incur a range of costs. These costs can be be broken into different categories

1. Fixed costs (FC) are costs that do not change as the level of output changes

   • These have to be paid whether output is zero or 5000 

     • E.g. Building rent, management salaries, insurance, bank loan repayments, etc.

2. Variable costs (VC) are costs that vary directly with output

   • These increase as output increases, & vice versa

     • E.g. Raw material costs, wages of workers directly involved in production

3. Total costs (TC) are the sum of the fixed + total variable costs

The distinction between short run and long run costs

• The distinction between short run and long run costs revolves around the degree of flexibility in adjusting inputs (the factor of production)
   

• In the short run, some inputs are fixed and cannot be varied easily, such as capital equipment or the size of the production facility

  • Variable inputs like labour and raw materials can to a certain extent be adjusted

  • Short run costs include both fixed and variable costs, but the state of capital is fixed 

• In the long run, all inputs are able to change

  • Firms have the flexibility to adjust their production processes, expand or contract their scale of operations, and invest in new capital equipment

  • Consequently, all costs become variable as firms can make adjustments to their input mix to optimise production efficiency

Cost Calculations & Cost Graphs

• Based on the above definitions, we can calculate several different types of costs

1. 

2. 

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