Total cost

In economics, total cost (TC) is the total economic cost of production and is made up of variable cost, which varies according to the quantity of a good produced and includes inputs such as labour and raw materials, plus fixed cost, which is independent of the quantity of a good produced and includes inputs that cannot be varied in the short term: fixed costs such as buildings and machinery, including sunk costs if any. Since cost is measured per unit of time, it is a flow variable.

Total cost in economics, unlike in cost accounting, includes the total opportunity cost (implicit cost) of each factor of production as part of its fixed or variable costs.

The rate at which total cost changes as the amount produced changes is called marginal cost. This is also known as the marginal unit variable cost.

If one assumes that the unit variable cost is constant, as in cost-volume-profit analysis developed and used in cost accounting, then total cost is linear in volume, and given by total cost = fixed cost + unit variable cost × amount of variable input used.

The total cost of producing a specific level of output is the cost of all the factors of input used. Often, economists use models with two inputs: physical capital, with quantity K; and labor, with quantity L. Capital is assumed to be the fixed input, meaning that the amount of capital used does not vary with the level of production in the short run. The rental price per unit of capital is denoted r. Thus, the total fixed cost equals Kr. Labor is the variable input, meaning that the amount of labor used varies with the level of output. In fact, in the short run, the only way to vary output is by varying the amount of the variable input. Labor usage is denoted L and the per unit cost, or wage rate, is denoted w, so the variable cost is Lw. Consequently, total cost is fixed cost (FC) plus variable cost (VC), or TC = FC + VC = Kr+Lw. In the long run, however, both capital usage and labor usage are variable.

Other economic models have the total variable cost curve (and therefore total cost curve) illustrate the concepts of increasing, and later diminishing, marginal returns.

In marketing, it is necessary to know how total costs divide between variable and fixed. "This distinction is crucial in forecasting the earnings generated by various changes in unit sales and thus the financial impact of proposed marketing campaigns." In a survey of nearly 200 senior marketing managers, 60% responded that they found the "variable and fixed costs" metric very useful.[1]

One can decompose total costs as the sum of fixed costs and variable costs. Here output is measured along the horizontal axis. In the Cost-Volume-Profit Analysis model, total costs are linear in volume.
Kostukurba 01-en
The total cost curve, if non-linear, can represent increasing and diminishing marginal returns.

Calculating Cost

  • Total product (= Output) = Q
  • Average Total Cost (ATC) = Total Cost / Q
  • Average Variable Cost (AVC) = Total Variable Cost / Q
  • Average Fixed Cost (AFC) = ATC – AVC
  • Total Cost (TC) = (AVC + AFC) × Q
  • Total Variable Cost (TVC) = AVC × Q
  • Total Fixed Cost (TFC) = TC – TVC
  • Marginal Cost (MC) = Change in Total Costs / Change in Q
  • Marginal Product (MP) = Change in Q / Change in Variable Factor
  • Marginal Revenue (MR) = Change in Total Revenue / Change in Q
  • Average Product (AP) = Q / Variable Factor
  • Total Revenue (TR) = Price × Q
  • Average Revenue (AR) = TR / Q
  • Total Product (Q) = AP × Variable Factor
  • Profit = TR – TC
  • Loss = TC – TR (if positive)
  • Break Even Point: value of Q such that AR = ATC
  • Profit Maximizing Condition: MR = MC

See also


  1. ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN 0-13-705829-2. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language in Marketing Project.
Average cost

In economics, average cost or unit cost is equal to total cost (TC) divided by the number of unit of a good produced (the output Q):

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). Average costs may be dependent on the time period considered (increasing production may be expensive or impossible number in the short term, for example). Average costs affect the supply curve and are a fundamental component of supply and demand.

Cost curve

In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms optimize their production process by minimizing cost consistent with each possible level of production, and the result is a cost curve; and profit maximizing firms use cost curves to decide output quantities. There are various types of cost curves, all related to each other, including total and average cost curves; marginal ("for each additional unit") cost curves, which are equal to the differential of the total cost curves; and variable cost curves. Some are applicable to the short run, others to the long run.

Economic efficiency

In microeconomics, economic efficiency is, roughly speaking, a situation in which nothing can be improved without something else being hurt. Depending on the context, it is usually one of the following two related concepts:

Allocative or Pareto efficiency: any changes made to assist one person would harm another.

Productive efficiency: no additional output of one good can be obtained without decreasing the output of another good, and production proceeds at the lowest possible average total cost.These definitions are not equivalent: a market or other economic system may be allocatively but not productively efficient, or productively but not allocatively efficient. There are also other definitions and measures. All characterizations of economic efficiency are encompassed by the more general engineering concept that a system is efficient or optimal when it maximizes desired outputs (such as utility) given available inputs.

Economic order quantity

In inventory management, economic order quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs. It is one of the oldest classical production scheduling models. The model was developed by Ford W. Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, and K. Andler are given credit for their in-depth analysis.

Indore Metro

The Indore Metro is a rapid transit light metro system which is under construction for the city of Indore, India. The total system consists of 10 corridors covering a distance of 124 kilometres (77 mi). This project will cost approximately ₹12,000 crore (US$1.7 billion). The cost per km will be 182 crores and total cost is 15,000 crores. There will be three types of run – on road, on bridges, and underground in some locations.

Libo Airport

Libo Airport (Chinese: 荔波机场) (IATA: LLB, ICAO: ZULB) is an airport serving Libo County, Guizhou Province, China. It is also called Qiannan Airport (Chinese: 黔南机场) because of its location in the Qiannan Buyei and Miao Autonomous Prefecture. Construction for the airport started in July 2003 and was completed in September 2007 at a total cost of 390 million yuan. However, since its opening the airport has been plagued by the lack of flights and passengers, handling only 151 passengers in all of 2009.

List of most expensive video games to develop

The following is a list of the most expensive video games ever developed, with a minimum total cost of US$50 million and sorted by the total cost adjusted for inflation.

Marginal cost

A conventional marginal cost curve with marginal revenue overlaid. Marginal cost and marginal revenue are measured on the vertical axis and quantity is measured on it is the cost of producing one more unit of a good. Intuitively, marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are fixed and thus have no marginal cost. For example, the marginal cost of producing an automobile will generally include the costs of labor and parts needed for the additional automobile and not the fixed costs of the factory that have already been incurred. In practice, marginal analysis is segregated into short and long-run cases, so that, over the long run, all costs (including fixed costs) become marginal.

If the cost function is differentiable, the marginal cost is the first derivative of the cost function with respect to the output quantity :

The marginal cost can be a function of quantity if the cost function is non-linear. If the cost function is not differentiable, the marginal cost can be expressed as follows:

where denotes an incremental change of one unit.

Markup (business)

Markup is the ratio between the cost of a good or service and its selling price. It is expressed as a percentage over the cost. A markup is added into the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product. Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price. Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.

Mid Valley Komuter station

The Mid Valley Komuter station is a KTM Komuter train halt located in Lembah Pantai, Kuala Lumpur. The halt is on the KTM Komuter's Seremban Line.

The station was completed at a total cost of RM12.2 million, and opened to the public on August 2004.

Mumbai Nashik Expressway

Mumbai Nashik Expressway (mr:मुंबई नाशिक द्रुतगती मार्ग) is a 150 km (93 mi) long highway connecting Mumbai to Nashik. The total cost of the project is ₹40 billion (US$560 million). At the time when this project was awarded, it was the largest BOT road project in India. The project involves increasing the number of lanes on the 99.5 km Vadape-Gonde (Mumbai-Nasik) section of the National Highway-3 to four.

NISAR (satellite)

The NASA-ISRO Synthetic Aperture Radar (NISAR) mission is a joint project between NASA and ISRO to co-develop and launch a dual-frequency synthetic aperture radar on an Earth observation satellite. The satellite will be the first radar imaging satellite to use dual frequencies. It will be used for remote sensing, to observe and understand natural processes on Earth. For example, its right-facing instruments will study the Antarctic cryosphere.With a total cost estimated at US$1.5 billion, NISAR is likely to be the world's most expensive Earth-imaging satellite.

PlayStation Theater

PlayStation Theater (formerly Best Buy Theater and Nokia Theatre Times Square)

is an indoor live events venue, owned and managed by Anschutz Entertainment Group (AEG) and Sony (100%), located on 1515 Broadway, at the corner of Broadway and 44th street. It was designed by architect David Rockwell and opened in September 2005. The venue has a large standing room orchestra section, combined with a large area of seating towards the rear of the auditorium.The venue was originally built as the Loew's Astor Plaza Theatre, a movie theater operated by Loews Theatres, which opened in 1974 and closed in August 2004. The estimated total cost of the transformation was $21 million.

Profit maximization

In economics, profit maximization is the short run or long run process by which a firm may determine the price, input, and output levels that lead to the greatest profit. Neoclassical economics, currently the mainstream approach to microeconomics, usually models the firm as maximizing profit.

There are several perspectives one can take on this problem. First, since profit equals revenue minus cost, one can plot graphically each of the variables revenue and cost as functions of the level of output and find the output level that maximizes the difference (or this can be done with a table of values instead of a graph). Second, if specific functional forms are known for revenue and cost in terms of output, one can use calculus to maximize profit with respect to the output level. Third, since the first order condition for the optimization equates marginal revenue and marginal cost, if marginal revenue and marginal cost functions in terms of output are directly available one can equate these, using either equations or a graph.

Fourth, rather than a function giving the cost of producing each potential output level, the firm may have input cost functions giving the cost of acquiring any amount of each input, along with a production function showing how much output results from using any combination of input quantities. In this case one can use calculus to maximize profit with respect to input usage levels, subject to the input cost functions and the production function. The first order condition for each input equates the marginal revenue product of the input (the increment to revenue from selling the product caused by an increment to the amount of the input used) to the marginal cost of the input.

For a firm in a perfectly competitive market for its output, the revenue function will simply equal the market price times the quantity produced and sold, whereas for a monopolist, which chooses its level of output simultaneously with its selling price, the revenue function takes into account the fact that higher levels of output require a lower price in order to be sold. An analogous feature holds for the input markets: in a perfectly competitive input market the firm's cost of the input is simply the amount purchased for use in production times the market-determined unit input cost, whereas a monopsonist’s input price per unit is higher for higher amounts of the input purchased.

The principal difference between short-run and long-run profit maximization is that in the long run the quantities of all inputs, including physical capital, are choice variables, while in the short run the amount of capital is predetermined by past investment decisions. In either case there are inputs of labor and raw materials.

Rovinari Power Station

The Rovinari Power Station is one of the largest electricity producers in Romania, having 4 groups of 330 MW each thus totaling an installed capacity of 1,320 MW.

The power plant is undergoing modernization works, which will add a new 500 MW group at a total cost of US$600 million. After the modernization, the power plant will have a total installed capacity of 1,820MW. Other important works include the fitting of several sulfur filters at the existing power groups at a total cost of US$250 million.The power plant is situated in the Gorj County (South-Western Romania) on the banks of the Jiu River near Târgu Jiu.

Slieve True

Slieve True or Slievetrue (from Irish Sliabh an Triúir, meaning 'hill of the three') is a 312 m-high (1,024 ft) hill in County Antrim, Northern Ireland. It is near Knockagh Monument and Monkstown, about 6 km (3.7 mi) north of Belfast.

Slieve True derives its name from three standing stones (known as "The Three Brothers") about one-half mile (0.80 km) southwest of the summit. These have since been integrated into a field wall. There is also a cairn in the area.In May 2013, Irish electricity company Gaelectric opened a wind farm in the Carn Hill area of Slievetrue, consisting of six wind turbines at a total cost of £20 million.

Stadionul Central (Recea)

Stadionul Central is a multi-use stadium in Recea, Romania. It is used mostly for football matches and is the home ground of Comuna Recea and Independența Baia Mare. The stadium was opened on 9 May 2018, having a covered stand of 600 seats, a pitch covered with grass and a second training ground. The total cost of the construction was amount €300,000.

Total cost of ownership

Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system. It is a management accounting concept that can be used in full cost accounting or even ecological economics where it includes social costs.

For manufacturing, as TCO is typically compared with doing business overseas, it goes beyond the initial manufacturing cycle time and cost to make parts. TCO includes a variety of cost of doing business items, for example, ship and re-ship, and opportunity costs, while it also considers incentives developed for an alternative approach. Incentives and other variables include tax credits, common language, expedited delivery, and customer-oriented supplier visits.

Whole-life cost

Whole-life cost, or Life-cycle cost (LCC), refers to the total cost of ownership over the life of an asset. Also commonly referred to as "cradle to grave" or "womb to tomb" costs. Costs considered include the financial cost which is relatively simple to calculate and also the environmental and social costs which are more difficult to quantify and assign numerical values. Typical areas of expenditure which are included in calculating the whole-life cost include planning, design, construction and acquisition, operations, maintenance, renewal and rehabilitation, depreciation and cost of finance and replacement or disposal.

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