Cost of production
For all practical purpose, the measure of production cost is money, and the cost is figured in terms of payments for labor, capital, materials, and other items directly or indirectly related to production. In addition, in a market economy, an imputed cost allowance is made for the services of the entrepreneur. As we have noted, it is the opportunity for profit that induces the entrepreneur to assume the risks and undertake the production. Once a business is in operation, a certain minimum profit is essential if the entrepreneur is to continue producing a goods or service. This amount of profit, therefore, is viewed as a cost of production.
Variable costs are costs of production that very with the amount of output produced, such as the costs of labor and materials. The total variable costs changes as output changes. The average variable cost is found by dividing the total variable cost by the number of units produced. As long as the prices of the variable resources email constant, the average variable cost decreases as output increases until the point of diminishing marginal returns reached.