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Cost Concepts in Economics

Chapter 18

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Agenda Cost Concepts

Revenue Concepts

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Types of Costs Variable Costs

These costs exist only if production occurs. E.g., fuel for tractor, seed, etc.

Fixed Costs These cost exist whether production occurs or

not. In the long-run there are no fixed costs. Can be both cash and non-cash expenses. E.g., depreciation on tractors and buildings,

etc.

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Cost Concepts Total Fixed Costs (TFC)

The summation of all fixed and sunk costs to production.

Total Variable Costs (TVC) The summation of all variable costs to

production. Total Costs (TC)

The summation of total fixed and total variable costs.

TC=TFC+TVC

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Cost Concepts Cont. Average Fixed Costs (AFC)

The total fixed costs divided by output. Average Variable Costs (AVC)

The total variable costs divided by output. Average Total Costs (ATC)

The total costs divided by output. The summation of average fixed costs and

average variable costs, i.e., ATC=AFC+AVC.

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Cost Concepts Cont. Marginal Costs

The change in total costs divided by the change in output.

TC/Y The change in total variable costs

divided by the change in output. TVC/Y

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Revenue Concepts Revenue (TR) is defined as the

output price (py) multiplied by the quantity (Y).

Average revenue (AR) equals total revenue divided by output (Y), i.e., TR/Y, which equals py.

Marginal Revenue is the change in total revenue divided by the change in output, i.e., TR/Y.