Average cost
From Economypedia.com
Average cost is an economic term that is denoted by total cost of production divided by the number of units produced. Average cost is also the summation of average variable costs and average fixed costs. Average cost is one of the fundamental components of assessing demand and supply. It significantly affects the supply curve. Role of average cost curve is highlighted in monopolies and perfect competition.
There is a difference between price and average cost. Average cost is related to the elasticity of demand and elasticity of supply. In perfect competition, it is often seen that price is lower that average cost. This is due to marginal cost pricing.
Average cost is also used quite often in accounting and auditing. It is an important concept in labor economics as well. It has been observed that if average cost falls in long run along with increase in output, companies face economies of scale.
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Fixed cost
Fixed cost is a type of production cost that remains same. It is not affected by alterations in business activities of a particular company. A major example of fixed cost is payment of lease, which remains same and never change irrespective of business performance of a company. [1]
Average fixed cost (AFC)
In short-run production process,
Average fixed cost (AFC)= total fixed cost(TFC)/total quantity (Q)
Variable cost
Variable cost is the expense that changes in accordance to alterations in activities and business performance of a particular company. An example of variable cost would be expenses incurred in travel that keep varying as per number of trips made by people related to that company. [2]
Average variable cost
Average variable cost is obtained by dividing variable cost by total amount of units produced. Average variable cost is widely used in a number of fields like accounting and auditing, manufacturing, industries and technology. It is also related to concepts like closing down point and shutdown point. [3]
Relation between average cost and marginal cost
Average cost and marginal cost are closely related concepts. In cases where average cost is going down along with increase in output, average cost is higher than marginal cost. In cases where average cost goes up with increase in output, it is lesser than marginal cost. If average cost is fixed, marginal and average costs are same.
Weighted average cost of capital
Weighted average cost of capital (WACC) is a way of calculating cost of capital of a particular firm. In this case every capital category is weighted in a proportionate manner. Following items, which are mainly sources of capital for a company, are included in calculations of weighted average cost of capital – common stock, bond and preferred stock, for example. [4]
See also
- Cost
- Supply
- Demand
- Break-even
- Incremental cost
- Unit cost
- Irrelevant cost
- Weighted average cost of equity
References
Businessdictionary entry on average variable cost. Retrieved on August 21, 2008.
Investopedia entry on variable cost. Retrieved on August 21, 2008.
Investopedia entry on fixed cost. Retrieved on August 21, 2008.
External links
Article in econmodel.com
Further reading
Article in hspm.sph.sc.edu
