Total Cost in Economics: Definition & Formula

Total Cost in Economics: Definition & Formula
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  • 0:01 Definition of Total Cost
  • 2:03 Formula of Total Cost
  • 3:36 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn about what total cost really means in the economic world. Find out the important components that make up total cost and see how to correctly calculate some common total costs of products and services you may be familiar with.

Definition

Do you really know how much it costs to operate your car every month? Have you ever tried to calculate how much living in an apartment or a home costs? If you want to make sure you can afford these things, you need to have a good understanding of how to calculate total cost. It is very easy for people to underestimate their total costs. They often only include a portion of what it really costs to maintain or operate something. For example, if you ask your friend how much he spends on his car monthly, he might tell you $200 a month because that is what he pays for his car payment. Is he accurate, though, in his estimation? Let's explore this further.

Total cost (TC) in the simplest terms is all the costs incurred in producing something or engaging in an activity. In economics, total cost is made up of variable costs + fixed costs.

Variable costs (VC) are costs that change based on how many goods you buy or how much of a service you use. A simple way to think about variable costs is to look at your utility bill in your home. As you use more gas or electricity during the colder months, your heating bill is usually higher. When the weather is nicer, your bill typically goes down. When it is extremely hot outside, though, the bill can start to go back up as you need air conditioning. The cost therefore varies as your usage varies.

Fixed costs (FC) are costs that don't change from month to month and don't vary based on activities or number of goods produced. They stay exactly the same. These are easy to calculate and could be things like the set amount of rent you pay every month for your apartment or your $200 car payment. Regardless of whether you stay at your apartment 30 days during the month or 10 days during the month, the rent costs the same amount.

Total Cost = TFC + TVC
Total cost

Formula

TC (total cost) = TFC (total fixed cost) + TVC (total variable cost)

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