The greater the output, the greater will be the variable costs. Three important concepts are total cost, average total cost and marginal cost.
Marginal costs illustrated in column v is the extra cost incurred by increasing output by one unit. Total cost is calculated by adding up total fixed cost and total variable cost.
Variable costs include wages, costs of fuel and power and costs of raw materials. In contrast, variable costs changes with output changes. It is the addition to total cost incurred by increasing output by one unit.
Cost of production refers to the expenses incurred by a business firm in producing a commodity. In other words, MC has no relation to fixed cost. Thus if one total cost of producing 10 units of a commodity is Rs.
Marginal cost for the nth unit may be expressed as: It is the total cost of producing a particular output of the commodity in question. Besides, the total cost for producing a given amount of output becomes small when these resources are combined in optimum proportions.
Production with the old and out-dated technique involves higher cost. As the larger output requires the greater amount of resources, the total cost for larger output becomes large. The profit maximisation requires the use of the particular technique of production which would allow the optimum combination of factors.
In other words, it is the extra cost of producing on extra unit of output. There are different cost concepts. Thus, the cost of producing a tons of steel depends upon the quantities of iron ore, limestone, coal, blast-furnace, etc.
For example, in the construction industry the cost of land is the most important item of fixed cost. Let us make an in-depth study of the determinants and concepts of cost of production. We add these two costs to arrive at total costs.
A firm can produce at low cost when it produces with the new and improved techniques of production. The average total cost figures in column vi are found by dividing the total cost figures of column iv by the levels of output shown in column i.
It is divided into two parts total fixed cost and total variable cost. These costs will be the same whether output is 1 unit, 10 units, or even units of a commodity. MC as change in TVC: They will be the same even when output is zero. The cost to the firm of producing any output evidently depends upon the physical quantities of actual resources or services—labour, material, machine hours, and so forth—used in production.
In the short period the optimum combination for any given level of output is the least-cost combination possible with the fixed factor units. This is quite obvious because, as output increases, the figure for total fixed cost which remains unchanged is being divided by a larger volume of output.Medical Necessity, Quality Management, and Cost Efficiency Determinants.
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