Production cost is a collective cost of labor and raw material in producing goods. Production costs are generally categorized according to the responsiveness of a certain product version to different stages of production achieved.
Determine the production costs:
Costs are those expenses which a business faces in the procedure of supplying or providing services or goods to the consumer. There are variable and fixed costs in short run as there are variable and fixed characteristics of production.
Short run production costs:
TC = TFC + TVC
TC = Total Costs
TFC = Total Fixed Costs
TVC =Total Variable Costs
It is related to the fixed characteristics of production. It does not directly differ with the intensity of outcome. There are so many examples that can be used such as buildings rent, cost of permanent paid staff, loan tax or interest rate and business insurance cost. TFC remain stable as outcome raise.
AFC = TFC/Q
AFC = Average Fixed Cost
TFC = Total Fixed Cost
Q = Output/Outcome
Average Fixed Cost (AFC) will decrease constantly with outcome as Total Fixed Cost (TFC) is extending to the highest point of production. It cause the down fall of average cost.
Average Fixed Cost (AFC) decreases as the outcome increases. The business can extend their overhead cost through raising outcome in short run. If there is positive Fixed Cost (FC) then Average Fixed Cost (AFC) will not be zero.
The rise in Fixed Cost (FC) has no effect on Variable Cost (VC) of production. It means that the curve of average total cost (ATC) shifts. There is no change in revenue maximizing price and outcome of business as marginal cost curve is not change.
These are the costs that differ directly through outcome as more units of variable are considered necessary to raise outcome. For example, the pay of part-time employees or staff, charges of gas and electricity and cost of important machinery and necessary raw material. Total Variable Cost (TVC) increases as outcome rises.
AVC = TVC/Q
AVC = Average Variable Cost
TVC =Total Variable Cost
Q = Quantity
Average Variable Cost (AVC) is based on the cost of utilizing variable features compare to the average output of these features. If more units of labor will be appointed on the same cost then the contrary relationship in average variable cost and average cost. So, the maximization of average product will minimize the Average Variable cost.