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7 COSTS, PROFIT AND BREAK EVENT POINT

1 The main type of costs.
2 Total revenue and profit.
3 Break-even point.

Key words: fixed costs, variable costs, total costs, price, quantity of goods,
economic profit, total revenue, break-even point.

There are different types of economic costs.
Fixed Costs (FC). The costs which don’t vary with changing output. Fixed
costs might include the cost of building a factory, insurance and legal bills. Even if
your output changes or you don’t produce anything, your fixed costs stay the same. In
the above example, fixed costs are always £1,000.
Variable Costs (VC). Costs which depend on the output produced. For
example, if you produce more cars, you have to use more raw materials such as
metal. This is a variable cost.
Semi-Variable Cost. Labour might be a semi-variable cost. If you produce
more cars, you need to employ more workers; this is a variable cost. However, even
if you didn’t produce any cars, you may still need some workers to look after empty
factory.
Total Costs (TC) = Fixed + Variable Costs
Marginal Costs – Marginal cost is the cost of producing an extra unit. If the
total cost of 3 units is 1550, and the total cost of 4 units is 1900. The marginal cost of
the 4th unit is 350.
Opportunity Cost – Opportunity cost is the next best alternative foregone. If
you invest £1million in developing a cure for pancreatic cancer, the opportunity cost
is that you can’t use that money to invest in developing a cure for skin cancer.
Economic Cost. Economic cost includes both the actual direct costs
(accounting costs) plus the opportunity cost. For example, if you take time off work
to a training scheme. You may lose a weeks pay of £350, plus also have to pay the
direct cost of £200. Thus the total economic cost = £550.
Accounting Costs – this is the monetary outlay for producing a certain good.
Accounting costs will include your variable and fixed costs you have to pay.
Sunk Costs. These are costs that have been incurred and cannot be recouped.
If you left the industry, you could not reclaim sunk costs. For example, if you spend
money on advertising to enter an industry, you can never claim these costs back. If
you buy a machine, you might be able to sell if you leave the industry.
Avoidable Costs. Costs that can be avoided. If you stop producing cars, you
don’t have to pay for extra raw materials and electricity. Sometimes known as an
escapable cost.
Market Failure:
 Social Costs. This is the total cost to society. It will include the private costs
plus also the external cost (cost incurred by a third party). May also be referred to as
‘True costs’

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