Production And Costs

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COSTS: The expenses incurred by the producer on hiring & Purchasing the factors of production are known as the cost of production. Total cost is the amount of money incurred on the production of a given level of output.

Long Run Costs: In the long run, all inputs are variable. Hence, there is no distinction between fixed costs and variable costs. The total cost and the total variable cost, therefore, coincide in the long run.

In short run, some factors (like machinery, building, technical labour) are fixed which cannot be changed due to an insufficiency of time while others (like raw material, power, labour etc) are variable which can be changed according to the output to be produced.

Short run costs basically consist of Fixed Costs (FC) and Variable Costs.

1. Fixed Costs (FC): Fixed costs are the costs which do not change in the level of output.
2. Variable Costs (VC): These are costs which vary directly with the change in the level of output.

In short run, Total costs (TC) comprise total fixed cost and total variable cost. i.e. TC = TFC + TVC. Similarly, we can find out Average Fixed cost (AFC), Average Variable Cost (AVC), ATC (Average Total cost), MC (Marginal cost).

Average Fixed Cost: It is the per unit cost of producing a commodity.

Average Variable Cost: It is the per unit variable cost of producing a commodity.

Average Total Cost: It is per unit cost of production of a commodity.


Marginal Cost (MC): It is the addition to the total cost when an additional unit of a commodity is produced or when output is increased by one unit.