Cost Concepts > Total Costs

Total cost is the total amount of money spent by a firm to produce a given quantity of goods or services.

"Total cost of production is the sum of all expenditure incurred in producing a given volume of output." — Dooley

  TC = FC + VC
(TC = Total Cost, FC = Fixed Cost, VC = Variable Cost)

"Fixed costs are costs which do not change with change in the quantity of output." — Anatol Murad

• Fixed costs are expenses that stay the same no matter how much is produced.
• Examples: Rent, salaries to permanent staff, insurance, licence fees.
• Paid even when output is zero—these costs are called "unavoidable" or "overhead" costs.
• Analogy: Think of shop rent—you pay it whether you sell anything or not.

Table:

Curve: The fixed cost curve is a horizontal line (straight and parallel to X-axis).

"Variable cost is that part of total cost which varies directly with output." — McConnell

• Variable costs are expenses that change depending on how much is produced.
• Examples: Raw materials, electricity, transport, wages for temporary workers.
• Paid only if something is produced—called "prime" or "direct" costs.
• Analogy: The cost of ingredients for baking cakes—cost goes up as more cakes are made.

Table: 

Curve: The variable cost curve starts at zero and slopes upwards.

Total cost (TC) at each level is the sum of fixed cost (FC) and variable cost (VC). As output increases, FC remains constant, VC rises, so TC goes up.

• Fixed costs remain constant at any output level.
• Variable costs change as output changes.
• Total cost equals the sum of fixed and variable costs.
• Average fixed cost (AFC) drops as output increases because FC is spread over more units.