Page 136 - DECO405_MANAGERIAL_ECONOMICS

Unit 8: Cost Analysis

Notes
Figure 8.5

Task Fill in the blanks in the following table:

Output TFC TVC TC MC AFC AVC ATC
1 100 50
2 30
3 40
4 270
5 70

8.4 Total Cost, Average Cost and Marginal Cost

Total cost includes all cash payments made to hired factors of production and all cash charges
imputed for the use of the owner's factors of production in acquiring or producing a good or
service. Thus, total cost of a firm is the sum total of the explicit plus implicit expenditures
incurred for producing a given level of output. For example, a shoe maker's cost will include the
amount he spends on leather, thread, rent for his workshop, wages, interest on borrowed capital,
salaries of employees, etc., and the amount he charges for his services and his own funds invested
in the business.
Average cost is the cost per unit of output assuming that production of each unit of output incurs
the same cost. That is, it is obtained by dividing the total cost by the total quantity produced. If
TC=100 and X=10, AC = 10.
Marginal cost is the extra cost of producing one additional unit. At a given level of output, one
examines the additional costs being incurred in producing one extra unit and this yields the

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