The cost of production refers to expenditures on inputs or resources employed in a production process. In other words, the sum total of rent, wages, and interest on borrowed funds constitutes the total cost of production. The total cost of production has two main components: total fixed cost and total variable cost.
Total Fixed Cost (TFC) and Total Variable Cost (TVC) in Agribusiness
Total fixed cost refers to the costs of fixed inputs, or resources, whose utilization does not vary with the level of output. These costs are independent of the level of production. Examples include the costs of machinery and buildings.
Total variable costs, on the other hand, are costs incurred on the employment of variable factors of production. These are costs that can change in the short run based on the level of output.
Examples include wages, raw materials, fuel, and transportation. Variable costs are also referred to as prime costs or direct costs. The total cost of production is the sum of variable costs and fixed costs, represented by the formula:
TC = TFC + TVC
Average Total Cost, Average Fixed Cost, and Average Variable Cost in Agribusiness
Total cost, fixed cost, and variable cost are important concepts in agribusiness, but much of the focus tends to be on average cost. To calculate a firm’s average cost, the total amount of the cost in question is divided by the quantity of product produced.
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1. Average Total Cost (ATC)
Average total cost is defined as the total cost per unit of output. It is calculated by dividing the total cost by the total output, as shown in the formula:
2. Average Fixed Cost (AFC)
Average fixed cost is the fixed cost per unit of output. It is calculated by dividing the total fixed cost by the quantity of output produced:
3. Average Variable Cost (AVC)
Average variable cost refers to the variable cost per unit of output. It is obtained by dividing the total variable cost by the total output:
The most important average cost concept in agribusiness, average total cost, can be viewed as the sum of average fixed cost and average variable cost:
ATC = AFC + AVC
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Marginal Cost in Agribusiness
Marginal cost is the increase (or decrease) in total cost that results from increasing (or decreasing) the level of output by one unit. It represents the addition made to the total cost by producing an additional unit of output. Marginal cost is expressed as:
MC = TCn – TCn-1
Marginal cost is independent of the level of output. As the marginal product of output rises, reaches its maximum, and then declines, the marginal cost first declines, reaches its minimum, and then rises. This gives the marginal cost curve a U-shaped appearance.
The article has explained the basic theory of cost in agribusiness. It has defined total cost and its components, while also exploring the relationships between these cost components. The importance of average and marginal costs in decision-making for agribusiness operations has been emphasized.
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