Total cost


In economics, total cost 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.
Total cost in economics, unlike in cost accounting, includes the total opportunity 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.
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 X 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 plus variable cost, 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 illustrate the concepts of increasing, and later diminishing, marginal return.
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.

Calculating cost