All firms, whether they produce goods or services, are subjected to operational costs.

Variable costs, are those which increase and decrease with the productivity of a firm.

Fixed costs are costs which exist regardless of the level of production of the firm. Fixed costs do not fluctuate with productivity.

Total cost is the sum of total fixed costs and total variable costs (TC= TFC + TVC).

Average cost is defined as total cost divided by output or quantity produced (AC= TC/Q).

Marginal cost is defined as the increase in total cost that arises from the production of an additional unit of output (MC=∆TC/∆Q).