Costs of Production

Firms make use of factors of production in order to produce goods and services, each of which has a cost (or price) attached to it, they are known as cost of production.  In general it is the expenses in terms of money for buying the raw materials, services and other expenses to run the business (production).
Total cost is the sum total of all the costs of inputs used in the production process. The total inputs are classified into two main categories [fixed cost    and   variable cost]. 
 Therefore Total cost      =   variable cost   +    fixed cost.
Fixed factors are those factors whose supply cannot be changed easily and quickly (it is relatively a long period like building a new    factory or installation of a new machinery etc.
Variable factors are those factors whose supply can be changed easily and quickly (it is possible in a very short period  like increasing  raw materials, hand tools etc.)
Fixed cost is a part of total cost that does not change as output changes in the short run.   Rent, wages, insurance premium, interest on loans, depreciation etc. are fixed in nature and they do not vary with the change in production.  It is also known as indirect costs
Depreciation is a fixed cost. The cost incurred due to the loss of value of capital assets due to wear and tear is depreciation.  The capital assets such as machineries, motor vehicles gradually   become out of date.
Variable cost is the part of total cost that changes with the change in output. It is also known as direct costs.   The cost incurred on raw materials, power, etc. changes when output changes. 

In Economics, marginal refers to additional and it is one of the most important concepts. Marginal cost is the additional cost incurred when the firm increases the output by one unit. OR
It is the Net addition to the total cost when production increased by one unit, and calculated using,        
Marginal Cost = Total cost of ‘n’ units – Total cost of ‘n-1’ units 
Average cost is the cost per unit product. Total cost is divided by number of units of output we get the average cost
There is a relationship between fixed cost, variable Cost, total Cost, marginal Cost, and average Cost.   1)  Fixed cost is fixed throughout the short run period. 2)  As output increases total cost goes on increases.    3) Variable cost increases along with the changes in production. 4)  When productivity  increases, marginal cost  and average cost  steadily declines  and then steadily increases.
This is because, when a firm expanding its output with a fixed capacity, in the beginning firm experience increasing returns to its variable factors and later diminishing returns. A profit maximising firm will consider the lowest point of average cost as their Optimum point of production
Firms prefer to produce at the optimum point of production.  The best level is where cost of producing each good at the lowest level possible average.  At this point the entrepreneur organize and combine the factors of production in the most cost effective or efficient way 
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