Variable Cost & Fixed Cost - Economics
Learn about the marginal cost of production and how it is affected by changes in fixed and variable costs. variable costs. Its position reflects the amount of fixed costs, and its gradient reflects variable costs. Marginal cost is the cost of producing one extra unit of output. It can be The general rules governing the relationship are: Marginal cost. Because average cost includes fixed cost but marginal cost does not, it is Relationship Between Marginal and Average Variable Costs.
It incorporates all negative and positive externalitiesof both production and consumption. Examples might include a social cost from air pollution affecting third parties or a social benefit from flu shots protecting others from infection. Externalities are costs or benefits that are not borne by the parties to the economic transaction.
A producer may, for example, pollute the environment, and others may bear those costs. A consumer may consume a good which produces benefits for society, such as education; because the individual does not receive all of the benefits, he may consume less than efficiency would suggest. Alternatively, an individual may be a smoker or alcoholic and impose costs on others.
In these cases, production or consumption of the good in question may differ from the optimum level. Negative externalities of production[ edit ] Negative Externalities of Production Much of the time, private and social costs do not diverge from one another, but at times social costs may be either greater or less than private costs.
When marginal social costs of production are greater than that of the private cost function, we see the occurrence of a negative externality of production. Productive processes that result in pollution are a textbook example of production that creates negative externalities. Such externalities are a result of firms externalizing their costs onto a third party in order to reduce their own total cost.
As a result of externalizing such costs, we see that members of society will be negatively affected by such behavior of the firm. In this case, we see that an increased cost of production in society creates a social cost curve that depicts a greater cost than the private cost curve.
Marginal cost - Wikipedia
In an equilibrium state, we see that markets creating negative externalities of production will overproduce that good. As a result, the socially optimal production level would be lower than that observed. Positive externalities of production[ edit ] Positive Externalities of Production When marginal social costs of production are less than that of the private cost function, we see the occurrence of a positive externality of production.
Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost. Variable costs are expenses that change in proportion to the activity of a business.
Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs.
For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw materials is used and spending therefore rises. Average cost per unit Average cost is equal to total cost divided by the number of goods produced. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit.
You might wonder that the output level is changed in all the three-quarters, so the variable cost will also change, but only in the total amount but not in the unit price. The Variable cost is divided into two categories, they are: Fixed Cost is the cost which does not vary with the changes in the quantity of production units.
Variable Cost is the cost which varies with the changes in the number of production units.
Costs of production
The Fixed cost is time-related, i. Unlike Variable Cost which is volume related, i. Fixed Cost is definite; it will incur even when there is no units are produced.
Conversely, Variable Cost is not definite; it will incur only when the enterprise does some production. Fixed cost changes in per unit. On the other hand, variable cost remains constant in per unit.