Final answer:
A standard cost is a predetermined cost, used as a benchmark for budgetary control and not necessarily related to past or industry average costs. Firms calculate average total cost and marginal cost to manage production costs and ensure profitability when these are lower than the market price.
Step-by-step explanation:
A standard cost is a predetermined cost that serves as a benchmark for measuring performance. It is not an average cost in the industry, nor is it directly related to the historical cost of producing a product. Instead, standard costs are used by companies for budgeting and controlling expenses. When it comes to understanding costs, we often look at average total cost, which we calculate by taking the total cost and dividing it by the total output at each different level of output. We also look at marginal cost, which is the cost of producing one more unit of output, calculated by the change in total cost divided by the change in output.
In a graphical representation, average costs are typically U-shaped. Firms enjoy a profit when their average cost of production is lower than the market price. This comparison between average cost and market price is crucial for firms aiming to maintain a competitive advantage and profitability in their respective markets.