Cost Variables

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Matters of economic cost can vary greatly. One of the most obvious, actual costs addresses real transactions while opportunity costs address the fees of resource allocation dedicated to researching the value of choosing between multiple options (Piana, 2003, p. 2). Discretionary and attributed costs distinguish between expenditures viewed as unnecessary to "strategic goals" and calculation costs are given to the effort of establishing proper fees (Piana, 2003, p. 2). A fixed cost, such as the fee for leasing land to operate the business on, does not shift according to production output while production costs associated with the supply chain generally increase with greater production (Piana, 2003, p. 2). Quasi-fixed costs operate on a tier system where the difference between the cost of production of X units and X+1 units could increase substantially; variable costs will simply increase alongside production, but not necessarily in equal correlation (Piana, 2003, p. 3). This summarizes the variety of economic cost measurement possibilities.

If a firm is operating at the minimum point of its short-run average total cost curve, it should consider the potential for market expansion and the activity-based costs associated with that. As the per-unit cost will increase within the current plant for increased production thereby reducing profitability, administrators should allocate opportunity costs to determine whether there is enough demand for an additional plant.

In the short-run, a firm may continue to operate a loss because they want to take control of the market and maintain a presence. If substantial fixed costs are involved regardless of operation, they will be motivated to push through the short-run unprofitability as they will be required to pay regardless.

If a firm produces 1,000 units of output with average fixed costs at $100 and average variable costs at $50, the total cost will amount to $150,000. The total revenue will amount to $200,000, which, minus unit of output cost, will equate to $50,000 of total profit.

References

Piana, V. (2003, January 1). Costs: A key concept in economics. Economics Web Institute. Retrieved from http://www.economicswebinstitute.org/glossary/costs.htm

Bouman, J. (1994). Essential Principles of Microeconomics. Upper Saddle River, NJ: Pearson Custom Publications.