Concept of Cost part 1-converted (1)-converted.pdf

Concept of Cost part 1-converted (1)-converted.pdf

1. Part1
•Types ofCost

2. Concepts ofCost

3. Costofproduction
•In economics, the cost of production is defined as the expenditures
incurred to obtain thefactorsofproduction such as labor, land, and capital,
that are needed in the production process of aproduct.

4. sum total of explicit cost, implicit cost and normal profit is
called economiccost.
•sum total of explicit cost, implicit cost and normal profit is called economiccost.
2. ExplicitCost:
(a)It refers to the actual money expenditure of a firm on purchasing goods or
hiring factor services and non-factor inputs (like raw material, electricity, fueletc.)
(b)In other words, “explicit cost are those cash payments whichthe firm makes to
outsiders for their goods andservices.”
•
(c)For example—explicit cost of biscuit factory consists of flour, milk, sugar etc.
purchased from outside and rent, electricity, wages, interest etc paid to factor of
production.

5. ImplicitCost:
•(a) Implicit cost is the imputed or estimated value of inputs supplied by the
owner of the firmhimself.
•
(b)In other words, Implicit costs are cost of self-supplied factorsof
production, which are generally not recorded in firm’s accountbook.
•
(c)Implicit costs of a biscuit factory are imputed rent of owner’s own factory
building, imputed wages for owner’s working as a manager himself,
imputed interest on his money capital used in the factory,depreciation.

6. Short RunCost
•Cost function shows functional relationship between output and costof
production.It
gives the least cost combination of inputs corresponding to different levels
ofoutput.
Cost function is givenas:
C = f(X), ceteris paribus, where, C = Cost and X =Output

7. Short Runcost
•Short Run cost are those in which some factors of production are fixedand
others are variable. So, it is divided into twoparts:
•
(a)Fixed costs (b) Variablecosts

8. Total Fixed Cost (Supplement/Indirect/OverheadCost)
•1. Fixed costs are those costs of production which do not change with a change in
output.
•
2.These are the costs incurred on fixed factors, like rent of land and building,
interest, etc. These are unavoidable contractual costs.
3.Fixed costs are also called overhead costs or general costsbecause these are
common for all the units produced. These costs are alsocalled supplementary costs
or indirectcosts.
4.The shape of Total fixed Cost is horizontal (Parallel to X-Axis). They have to be
incurred when the output is large or small or evenzero.

10. Total Variable Cost (Prime/DirectCost)
•Total Variable Cost (Prime/DirectCost)
1.The cost incurred on variable factors of production is known as TVC.
TVC = TC –TFC
2.TVC is very much related with the production and fluctuates with the fluctuation
in production. In case of zero level of production, TVC would also bezero.
3.For example, Wages of casual labour, payment for raw material,etc.
•
4.The shape of Total Variable Cost is Inverse S-shape because of Law ofvariable
Proportion. There are two phases on which shape of total variable costdepends.

11. TVC
•In the first phase, TVC increase at a to lower cost of production. This is
because of proper utilization of fixed factor by employing more units of
variable factor, specialization and division of labour. diminishing rate,
[concave shape] i.e., every additional unit of output producedleads
(b) In the second phase, TVC increase at an increasing rate, [convexshape]
i. e., every additional unit of output produced leads to higher cost of
production. This is because of non-optimal combination of variable factor
with the fixedfactor.

13. TotalCost
•1. During production, the expenditure incurred on various factors of productionis known
as totalcost.
•
2.The thing, is has to remember, is that enterprise is one of the factors of production and
the return of enterprise is normal profit. So, normal profit is also included in totalcost.
•
3.In other words, it is a sum of total fixed cost and total variable cost.
TC=TFC+TVC
4.The shape of Total Cost is Inverse S-shaped because of law of variableProportion.

15. Quiz
•1.Total cost is equalto:
•Total fixed costs minus total variable costs
•Total fixed costs plus total variablecosts
•Marginal cost plus total fixedcosts
•None of the answers arecorrect
•2. Which statement is true of fixedcosts?
•Fixed costs stay thesame
•Fixed costschange
•Fixed costs are the combination of variable costs and totalcosts
•None of these answers aretrue

16. Quiz
•3. A business bought four trucks this year and spent a total of$90,000.
How much did each truckcost?
•$25,000
•$360,000
•$9,000
•$22,500
•4. Cost of self –owned resources iscalled
•5. What happens to the difference between total cost and total variablecost
as output isincreased.

17. Assignment
•1. Define cost as used ineconomics.
•2. What is economiccost?
•3. What is costfunction?
•4. What are the total fixed cost, total variable cost and total cost of a
firm? How are theyrelated?
•5. Give two examples of fixed costs and variablecosts.
•6. What do you understandbyexplicitand implicit costs? Give two
examples ofeach.
•7. What is the behavior of total variable cost as outputincreases?
•8. Why is total variable cost curve inverse S-shaped

18. Assignment
Output TC TFC TVC
0
1 30
2 100
3 50 60
4 70
5 150

19. video
•https://www.youtube.com/watch?v=Cbx4gPu8bCc