Welcome back to my blog! In my last blog, I introduced some different “revenues” and the relationship between their graphs. Today, before we will talk about different cost curve, we will initially discuss four concept, which will help us to understand different cost curve.

Total product is the quantity of output produced by a given number of workers over a given period of time. The amount of capital (machines) is fixed.

Average product is the quantity of output per unit of input. For example, if the input is labour, average product is the output per worker.

Marginal product is the increase in output that occurs from an additional unit of input (labour). As the number of workers increases, the marginal product declines. This is referred to as diminishing returns.

Diminishing marginal returns, which means that the output from an additional unit of input leads to a fall in the marginal product.

Just like last time, There are few concept about cost that we need to be familiar with.

Firstly, the Economic cost – This is the opportunity cost of production, value could have been generated had the resources been employed in their next best use.(just like what we discussed in last semester)

Secondly, Accounting cost, which is the actual input for the business.

Thirdly, Fixed cost, which is the costs that do not vary as output increases. For example: rent, office costs and, machinery.

Fourthly, Variable costs, which is the costs that vary as output increases. For example: raw materials. If a firm wants to make more chocolate, it will need more cocoa beans and sugar, then, the coca beans and sugar will be count as the variable cost.

The last one, Semi-variable cost. For example— Labour, many firms have a fairly permanent staff. If they need to increase output, the workers will be asked to do overtime, this is variable because the hours worked will rise, but the actual number of workers may not.

The calculation between different cost are including Total cost, Average cost, and Marginal cost.

Toal cost (TC) is the total cost to the firm of producing a given number of units, and the formula is given by: TC = Total Fixed Cost + Total Variable Cost

Average cost (AC) is the cost per unit of output produced, and the formula is given by: AC = TC/output or AC = Average Fixed Cost + Average Variable Cost.

Marginal cost (MC) is additional cost incurred from producing one more unit of output. It is the extra cost by producing the marginal unit of output. The formula is: MC = change in total cost / change in quantity.

It is also possible to illustrate these cost diagrammatically.

In the top diagram, the marginal cost curve falls to start with and then begins to rise, the average cost curve only starts to rise when the marginal cost curve rises above the average curve. That is because At point A, each worker adds more to total output than the last. But each worker paid the same wage, so each marginal unit will cost less, hence, the MC curve must be falling.

The bottom diagram shows the marginal product curve and the average product curve. Notice! At point B on the bottom diagram, each worker adds the same amount to total output then the last. Each worker is paid the same wage, so each marginal unit will cost the same on average. Hence, the marginal cost curve must be constant, or flat (see point B on the top diagram).

That’s all for today’s blog! We will illustrate more about cost graph in next blog!