![]() The reason for diminishing returns is that employing extra workers starts to lead to shortage of capital and Diagram of short-run average cost with Marginal Cost After this point, marginal cost starts to rise rapidly and so average costs start to rise as well. In the short run, capital is fixed initially, marginal cost falls until diminishing returns set in. ![]() Short-run average cost curves tend to be U shaped because of the law of diminishing returns. TC Total costs = FC+VC Short-run average costs VC = Variable costs – which do change with output AC= TC/QĪverage variable cost (AVC) is the total variable cost (VC) divided by quantity AVC = VC/QįC = Fixed costs – not changing with output Your fixed cost would go up, but you would have no variable costs, keeping your total cost more consistent.Average cost (AC) is the total cost (TC) divided by quantity. Therefore, you'll now have to find a way to reduce your variable costs or go to a gym that includes all of these things in your membership fee. This means that your total cost of using the gym for one month can actually be more than $100.īy figuring out your total cost, you might see that you're spending a lot more on using the gym than you initially thought. The trainer is $50 an hour, and the smoothies are costing you $5 each time. Perhaps you pay more to use the services of a personal trainer, or sometimes you like to buy protein shakes when you're done with your workout. However, there are some variable costs to consider. This is your fixed cost for using this particular service. However, if you look at an example in your own life, total cost can be easier to comprehend and calculate.įor example, imagine you pay $30 a month for a gym membership, or $360 a year. Total cost in economics can be a bit confusing to understand, especially when thinking about how it applies to business. (Average fixed cost + Average variable cost) x Number of units = Total cost An Example of Total Cost TC (Total cost) = TFC (Total fixed cost) + TVC (Total variable cost)Ī more complex total cost formula commonly used in business is: This is your total cost, which can also be expressed in a simple formula: Once you have this information, add together your fixed costs and your variable costs. In order to calculate total cost, you must first figure out what your fixed costs are and what your variable costs are. When you realize the total cost you are spending on something, it may encourage you to make a lifestyle change to reduce some of those costs. ![]() In the case of an individual, total cost can tell a person if the services he is using are worth it or if the cost of living is too high. Once it knows its total cost, the company could start to figure out which fixed costs and variable costs should be eliminated, reduced or changed, such as reducing salaries, finding lower shipping costs or finding a cheaper warehouse to lease. ![]() In the case of a business, total cost can motivate a company to look for ways to reduce or maximize profits. ![]() Total cost can help you determine if you are spending too much on something and whether or not you need to cut down on some of those costs. It provides specific information regarding what a company or person spends on average. Total cost is an important indicator of financial health.
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