Demand Curve

886 Words4 Pages
POLITEHNICA UNIVERSITY OF TIMISOARA
FACULTY OF ELECTRONICS AND TELECOMMUNICATIONS

COST OF PRODUCTION

IORDAN ELVIS CRISTIAN
2nd YEAR, GROUP 1.1

TIMISOARA, 2013

INTRODUCTION

Cost is a sacrifice of resources to obtain a benefit or any other resource. For example in production of a car, we sacrifice material, electricity, the value of machine 's life (depreciation), and labor wages etc. Thus these are our costs. Costs are usually classified as follows: * Product cost(cost of production) * Period cost
In this paper, we will analyze the cost of production with all what it involves. For the beginning, it is necessary to know that the cost of production is classified into:
- Direct materials: Represents the cost
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Consider the following hypothetical example of a boat building firm. The total fixed costs, TFC, include premises, machinery and equipment needed to construct boats, and are £100,000, irrespective of how many boats are produced. Total variable costs (TVC) will increase as output increases.

Plotting this gives us Total Cost, Total Variable Cost, and Total Fixed Cost.

Given that total fixed costs (TFC) are constant as output increases, the curve is a horizontal line on the cost graph. The total variable cost (TVC) curve slopes up at an accelerating rate, reflecting the law of diminishing marginal returns. The total cost (TC) curve is found by adding total fixed and total variable costs. Its position reflects the amount of fixed costs, and its gradient reflects variable costs. But, from an economical point of view, we cannot talk about fixed and variable costs without taking into consideration the marginal costs. In fact, marginal cost is the cost of producing one extra unit of output. It can be found by calculating the change in total cost when output is increased by one unit.

It is important to note that marginal cost is derived solely from variable costs, and not fixed costs. The marginal cost curve falls briefly at first, then rises. Marginal costs, as the economists say, are derived from variable costs (mentioned above) and
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