Economic cost: The sum of explicit and implied costs is known as economic cost.

Explicit cost: A company’s real money to buy and hire inputs is called explicit cost. These are recorded in
the balance sheets, such as wages, rent, interest, purchases of raw materials, etc.
Implicit cost: In any manufacturing process, implicit cost refers to the total cost of self-owned production
resources. Or it is equivalent to the value of total inputs provided by the manufacturer/owner. Generally,
these costs are not recorded explicitly in books of accounts.
Normal profit: This is the bare minimum necessary to keep producers going. In other words, the
minimum procurement price for the contractor. It is also known as the entrepreneurial salary.
Total cost (TC): The total cost represents the sum of all fixed and variable costs—the total amount a
business spends to produce a given quantity of a commodity.
TC = TFC + TVC or TC = AC × Q
TC = Total cost
TFC = Total fixed cost
TVC = Total variable cost
AC = Average cost
Q = Quantity/number of goods or services
These are total fixed cost (TFC), total variable cost (TVC) and total cost (TC) curves for a firm. Total cost
is the vertical sum of total fixed cost and total variable cost.
Total fixed cost (TFC): This also represents an additional cost such as renting of land and buildings,
interest on capital, licence fees, etc. So it is generally the total cost incurred by the manufacturer to
provide for all the fixed resources.
TFC = TC − TVC or TFC = AFC × Q
Features of Total Fixed Cost:
(a) It remains constant across all levels of production. Even on a zero exit level, it’s not zero, and further,
the TFC curve will be parallel to the X-axis.
(b) Total cost at zero output level will be equal to the total fixed cost.
Total Variable Cost (TVC):
TVC varies with the amount of the total output that is produced. If the output level is zero then TVC is
also zero.
TVC = TC – TFC or TVC = AVC × Q
Salient Features of Total variable cost:
1. If the output is zero, then AVC will also be zero.
2. There is an increase in output if the variable cost increases.
Average Cost (AC)
Average cost is defined as the cost of producing one unit of a commodity. It is represented as the sum of
the average fixed cost and average variable cost.
Average fixed cost: The fixed cost of producing a commodity per unit.
AC = TCQ or AC = AFC + AVC
AFC = TFCQ or AFC = AC = AVC
Features of AFC:
The average fixed cost curve is a rectangular hyperbola. The area of the rectangle OFCq1 gives us the
total fixed cost.
1. If the AFC decreases, then the output also increases.
2. The AFC curve is represented as a rectangular hyperbola.
3. The AFC cannot cross the X or Y axis.
Average variable cost: The variable cost of producing per unit of a commodity. As per the law of variable
proportion, AVC is U-shaped.
AVC = TVCQ or AVC = AC − AFC
The area of the rectangle OVBq0 gives us the total variable cost at q0
Relation between short-term costs
The total cost curve can be kept parallel to the total variable cost curve.
Relation between MC and AVC:
 If MC < AVC, then AVC falls.
 If MC = AVC, then AVC is minimum and constant.
 If MC > AVC, AVC rises, and the MC curve cuts to the lowest point.
Relation between MC and AC:
 If AC falls, then MC < AC.
 if AC rises, then MC > AC.
 if AC is constant and minimum, then MC = AC.
Revenue:
Revenue is defined as the total amount of money earned from the sale of any product or service.
Total Revenue (TR) is the total quantum of money received by a firm from the sale of a specific number
of units of a product.
TR = AR X Q or TR = ∑MR
TR = Total Revenue
MR = Marginal Revenue
AR = Average Revenue
Q = Quantity of a product
Relationship between TR, AR, and MR for more quantity sold at the same price:
 At all levels of output, average and marginal revenue remains constant. The AR and MR curves
remain parallel to the x-axis.
 Total revenue can grow at a constant rate. The MR is constant, and then the TR curve is a
positively sloped straight line through the origin.
Relationship between TR, AR, and MR for more quantity sold at a lower price:
 The slopes of average revenue and marginal revenue curves can be negative. Thus, the MR curve
is located beneath the AR curve.
 Marginal revenue declines twice as fast as average revenue.
Relationship between AR and MR (General relationship)
AR is maximum and constant when MR = AR. MR can be negative but AR cannot be negative.
When MR < AR, AR falls. When TR increases at any rate, then MR and AR increase.