Costs of Production
Costs are defined as expenses that a business faces in the process of supplying goods and services to the consumer. In short run costs of production we make distinctions between fixed and variable costs. Fixed costs are what relate to fixed factors of production. They do not differ directly with the level of output by firms. Common examples of fixed costs are costs such as rent of buildings, interest rate loans, and business insurance costs. With fixed costs there totals remain constant as output increases. Average fixed costs are determined by the total fixed costs divided by output. These average fixed costs will decrease with output specifically because total fixed costs are being diverted all over a higher level of production; which ultimately causes the average cost to decrease. Increases in fixed costs have no effect on variable costs of production. What this essentially means is that the only curve that shifts the total cost curve. Variable costs are costs which differ directly with output because there are more variable factors that are required to increase the output. Common example of vairbale costs are raw materials, part time employee wages (hourly employees), and costs of gasoline or electricity. With variable costs the total variable cost increase as output increases. Total variable costs are determined by the total variable costs divided output. These costs depend on variable factors which are compared to average productivity factors. Take for instance if there are additional units of labor that can be employed at a continuous cost, there will be an opposite relationship among the average product and the average variable costs. This basically means that when the average product is maximized, the average variable cost will be minimized.