There are a lot of expenditures in the production process. The factors of production are paid in the form of wages, rent and interest by the owner of the business.
To calculate the total expenditures served on the production process of any good or product, economists define the way as analysis of cost of production.
Analysis of the Cost of Production:
Following are the types in which cost of production of any product can be divided:
All types of expensive face by entrepreneur or firm are called total cost. It includes wages of labor, rent, wear tear of machines etc. or in other words all type of expenses during the production of specific amount of product or good.
Total cost can be divided into following two parts:
This type of cost is fixed and the owner of the factory has to pay this price even if the factory is not working or closed, such as rent of the land, wages of permanent employees, tax on the land etc.
This type of cost depends up on the units of output. Increase in output will increase the variable cost and vice versa. For example: price of raw material, utility bills (gas, electricity etc.), sales tax etc.
Average Total Cost (ATC):
It is average cost per unit of output.
So, ATC= TC/Q
TC = total cost
Q = total units of output
Average cost is divided into following two parts:
Average Fixed Cost:
When we divide fixed cost with total number of output we get, average fixed cost.
AFC = FC/Q
Average Variable Cost:
When we divide variable cost with total number of output we get, average variable cost.
AVC = VC/Q
The concept of marginal cost is very crucial in microeconomics. The cost which we have to pay due to producing an additional unit if the good. MC = TC/∆Q