costs

• Fixed costs


  Costs that do not vary with the level of output
• Sunk costs


  Costs required to start up the firm and cant be recovered if the firm closes down
• Variable costs

  Costs that vary directly with the level of output

  
  

  AVC/Q OR sum of all variable costs
• Total cost


  Sum of fixed + variable costs
• Examples of fixed costs


  • Rent
  • Consulting fees
  • Insurance
  • Salaries/Wages
  • Depreciation
  • Research projects
  • Marketing budgets
• Examples of variable costs


  • Part-time wage costs
  • Raw materials
  • Packaging costs
  • Energy + Fuel
  • Commission bonuses
  • Component parts
• Start-up firms normally have very high fixed costs.
• Average cost

  TC/Q
• Marginal cost


  The cost of producing an additional unit of output

  ^TC/^Q
• Examples of low marginal costs


  • Mass production
  • Downloading things online
  • Mass production of medications
• Examples of high marginal costs


  • Pursuing higher education
  • Tailoring
  • Buildings
  • Tesla cars
• MC is important to know whether producing an extra unit is worth it
• Total fixed cost

  Sum of all fixed costs
• Average variable cost


  Total FC / Q
• Average fixed cost

  Total FC / Q
• When output becomes to high, the AC in short run increases
• If MC<AC, the AC is pulled down.

  -> The last unit produced adds less to the TC than the AC per unit, lowering the average.