Cost Functions

# Types of Costs

Link to Transcript Transcript to Different Types of Costs

## Fixed Costs

- A fixed cost is a cost that does not vary with the amount of production a business is doing. Put statistically, they are costs that are not correlated with the volume index.
- Examples of fixed costs: rent, insurance, property taxes, interest expense, paid salaries, etc…

### Variable Costs

- A variable cost does change with the amount of production a business is doing. Put statistically, they are positivly correlated with the volume index
- Examples of variable costs: worker's wages, supplies/materials, etc…

### Total Costs

- Total costs are the fixed costs + the variable costs

## What is a volume index

- A volume index is a gathering of all the types of output that a company makes so they can compare them in a single measure.
- An ideal volume index will have a positive correlation and will have minimum deviation from its best fit line.

Link to Transcript Transcript to Volume Index

# Derived Costs

## Average Costs

- Average costs (AC) is total costs (TC) divided by quantity (q) of good produced
- $AC = TC/q$

Transcript of Intro Average Cost Video

**Real life costs don't look like our assumptions.** The assumptions are there to keep the math in line with the math prerequisites of the course.

Transcript of Real Life Average Costs

## Incremental Cost

- Incremental costs, or marginal costs, is the cost associated with producing one more unit of output.
- $AVC = VC/q$
- This is also referred to average variable cost (AVC) because it is the variable cost (VC) per quantity of output.

Transcript of Incremental and Differential Cost

# Simplifying assumptions

We make some simplifying assumptions to keep the math at the high school algebra level.

page revision: 59, last edited: 17 Aug 2016 16:20