 # Three Types of Costs

There are three types of costs:

1. Total cost.

2. Average cost per unit.

3. Marginal cost per unit.

All the following explanations about three types of costs relate to the production possibilities curve of Country A.

Total Cost

Moving from Point B to Point C adds 300 guns by sacrificing 600 loaves of bread (1,000 – 400 = 600). The total cost of this transaction (Transaction A) is 600 loaves of bread.

Moving from Point C to Point D adds 100 more guns by sacrificing 400 loaves of bread (400 – 0 = 400). The total cost of this transaction (Transaction B) is 400 loaves of bread.

Average Cost Per Unit

In Transaction A, one gun costs two loaves of bread (600/ 300 = 2) on the average.

In Transaction B, one gun costs four loaves of bread (400/ 100 = 4) on the average. If a loaf of bread costs \$1, then the average cost per gun would be \$2 in Transaction A, and \$4 in Transaction B.

To understand the meaning of opportunity cost, imagine that the product being sacrificed equals one dollar, and then replace the word dollar with gun or bread, whichever is relevant.