# Introduction to Microeconomics Cost Formulas

Let’s carry on from our introduction into microeconomics with a focus now on how firm’s costs vary with output in the short run (6months to 2 years).

Let’s Make an Important Assumption: Prices of inputs are assumed given (ie., firms can’t influence them)

## Analyzing Short Run Cost Structure

Family of total costs concepts.

There are three important concepts of total cost for analyzing a firm’s short-run cost structure:

1. Total Fixed Cost (TFC) – sum of all costs of production which do not vary with the level of output (e.g., property taxes, insurance rates, etc.)
2. Total Variable Cost (TVC) – Sum of all costs of production which do vary with output (e.g., pay roll expenses, raw materials outlay, etc.)
3. Total Cost (TC) – Sum of all costs to the firm for any level of output. TC = TFC + TVC

Family of unit cost concepts.

There are four major unity cost concepts:

1. AFC = Fixed Cost/Quantity (Q) = FC/Q

2. AVC = Variable Cost/Quantity (Q) = VC/Q

3. ATC = Total cost/Quantity (Q) = TC/Q

4. MC = Change in total cost/Change in quantity = delta TC/ delta Q

Derivation of short-run cost functions
Important Assumption: Prices of inputs are assumed fixed

Intuition: Unit costs should be decreasing when the firm is productive and vice-versa.

Total Cost Principle: When variable input efficiency is rising TVC increases more slowly; when variable input efficiency is declining, TVC increases more rapidly.

Unit Cost Principle: When variable input efficiency is rising, AVC is falling; when variable input efficiency is declining, AVC is rising.

** Cost Graph – Quantity on x
TVC on y

Relationship Between Marginal Cost and Average Total Cost:

– MC = ATC at the minimum point of the ATC
– This point is called the “capacity”
– Capacity = Quantity that minimizes average total cost.

(Here is a list of introductory microeconomic formulas.)

[tags]unit cost principle, cost principles, microeconomics, margin cost, total cost[/tags]

## One comment

1. mohamed eltoukhy says:

from TVC , TFC & QUANTITY how can i determin the price for producing certain quantity
Thank you