Economics can be a difficult class to take for high school or college students. However, not only is this subject an inevitable part of your coursework, it’s also important to learn it in order to apply it to your own life and have a sense of financial literacy. One of the best ways to understand what you’re learning in economics class is to understand how these concepts apply to the real world: for example, the concept of total cost.
What Is Total Cost in Economics?
Total cost is an economic term used to describe how much a product costs for the company to make or all the costs that are incurred to produce something. It can also be used to calculate how much it costs to utilize services.
To understand how to calculate total cost, you will need to know two terms:
- Fixed cost: A cost that is constant and already set in stone, such as the cost of leasing a warehouse or the cost of renting an apartment.
- Variable cost: The opposite of fixed cost: A cost that changes based on how many goods the company produces or how much of a service or additional services a person uses.
What Can Total Cost Tell Us?
Total cost is an important indicator of financial health. It provides specific information regarding what a company or person spends on average. Total cost can help you determine if you are spending too much on something and whether or not you need to cut down on some of those costs.
What Can You Do With Total Cost?
In the case of a business, total cost can motivate a company to look for ways to reduce or maximize profits. Once it knows its total cost, the company could start to figure out which fixed costs and variable costs should be eliminated, reduced or changed, such as reducing salaries, finding lower shipping costs or finding a cheaper warehouse to lease.
In the case of an individual, total cost can tell a person if the services he is using are worth it or if the cost of living is too high. When you realize the total cost you are spending on something, it may encourage you to make a lifestyle change to reduce some of those costs.
How to Calculate Total Cost
In order to calculate total cost, you must first figure out what your fixed costs are and what your variable costs are. Once you have this information, add together your fixed costs and your variable costs. This is your total cost, which can also be expressed in a simple formula:
TC (Total cost) = TFC (Total fixed cost) + TVC (Total variable cost)
A more complex total cost formula commonly used in business is:
(Average fixed cost + Average variable cost) x Number of units = Total cost
An Example of Total Cost
Total cost in economics can be a bit confusing to understand, especially when thinking about how it applies to business. However, if you look at an example in your own life, total cost can be easier to comprehend and calculate.
For example, imagine you pay $30 a month for a gym membership, or $360 a year. This is your fixed cost for using this particular service. However, there are some variable costs to consider. Perhaps you pay more to use the services of a personal trainer, or sometimes you like to buy protein shakes when you're done with your workout. The trainer is $50 an hour, and the smoothies are costing you $5 each time. This means that your total cost of using the gym for one month can actually be more than $100.
By figuring out your total cost, you might see that you're spending a lot more on using the gym than you initially thought. Therefore, you'll now have to find a way to reduce your variable costs or go to a gym that includes all of these things in your membership fee. Your fixed cost would go up, but you would have no variable costs, keeping your total cost more consistent.