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Accounting Cost - concerned with historical expenditures.
Economic Cost takes into account opportunity cost that has to be taken into consideration in the decision process (It is more costly for a doctor to mow the lawn on Monday at 10:00 than a janitor).
Sunk costs -costs that cannot be recovered.
Profit is the difference between revenue and cost for a given level of output q.
Economic profit = R - w L - r K where r K is the opportunity cost of capital. A firm making zero economic profits may still stay in business.
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If the short-run production function (Q =f(L) given fixed input and technology) and the prices of the inputs are known, all the short-run costs can be calculated. Often the producer will know the costs at a few levels of output and must estimate or calculate the production function in order to make decisions about how many units of the variable input to use or altering the size of the plant (fixed input).
Fixed Cost (FC) is the quantity of the fixed input times the price of the fixed input. FC is total fixed cost and may be referred to as TFC.
Average Fixed Cost (AFC) is the FC divided by the output or TP, Q, (remember Q=TP). AFC is fixed cost per Q.
Variable Cost (VC) is the quantity of the variable input times the price of the variable input. Sometimes VC is called total variable cost (TVC).
Average Variable Cost (AVC) is the VC divided by the output, AVC = VC/Q. It is the variable cost per Q.
Total Cost (TC) is the sum of the FC and VC.
Average Total Cost (AC or ATC) is the total cost per unit of output. AC = TC/Q.
Marginal cost (MC) is the change in TC or VC "caused" by a change in Q (or TP). Remember that fixed cost do not change and therefore do not influence MC. In Principles of Economics texts and courses MC is usually described as the change in TC associated with a one unit change in output,
