Economic Costs

There are seven important economic costs:

  1. Total Variable Cost (TVC).
    This is the cost of all variable inputs. Examples include the cost of temporary workers and hourly labor, the cost of materials, office supplies, energy, and taxes.
  2. Total Fixed Cost (TFC).
    This is the cost of all fixed inputs. Examples include the cost of the building, large pieces of machinery, certain fixed taxes (property tax), and salaried employees on long-term contracts.
  3. Total Cost (TC).
    This is the sum of TVC and TFC.
  4. Average Variable Cost (AVC).
    This is variable cost per product, or total variable cost divided by output.
  5. Average Fixed Cost (AFC).
    This is fixed cost per product, or total fixed cost divided by output.
  6. Average Total Cost (ATC).
    This is cost per product, or total cost divided by output.
  7. Marginal Cost (MC).
    This is the per product cost of producing an additional unit of the product, or the change in total cost divided by the change in output.

 

All of the above costs are economic costs. Thus, they include both implicit and explicit expenses. From now on when we refer to total cost, we mean total economic cost. For example, if total cost equals $10,000, then explicit costs are $8,000 if implicit costs are $2,000.