ECONOMICS COST CONCEPT

ECONOMICS COST CONCEPT

1. CONCEPT OF COST
PRESENTED BY
RAHUL LADUNA

2. MEANING OF COST
COST OF PRODUCING A GOOD IS THE SUM OF ACTUAL
MONEY EXPENDITURE ON PURCHASE OF INPUTS AND
ESTIMATED EXPENDITURE ON INPUTS SUPPLIED BY THE
FIRM ITSELF.
COST = EXPLICIT COST + IMPLICIT COST

3. EXPLICIT COST AND IMPLICIT COST
EXPLICIT COST –THE ACTUAL MONEY SPENT BY A FIRM ON BUYING
OR HIRING OF FACTORS OF INPUTS AND NON-FACTOR INPUTS IS
CALLED MONEY COST OR EXPLICIT COST.
IMPLICIT COST –IT IS THE ESTIMATED VALUE OF INPUTS SUPPLIED
BY THE OWNER OF THE FIRM HIMSELF.

4. COST FUNCTION
THE FUNCTIONAL RELATIONSHIP BETWEEN OUTPUT AND COST IS CALLED
COST FUNCTION.
C = ????????????
WHERE C = COST
F = FUNCTION
Q = UNITS OF OUTPUT
IN SHORT, COST FUNCTION STUDIES THE RELATIONSHIP BETWEEN THE
COST OF INPUTS AND LEVEL OF OUTPUT.

5. SHORT RUN COSTS
•1. TOTAL COST (TC)
REFERS TO THE TOTAL EXPENDITURE INCURRED BY A FIRM ON THE FACTOROF PRODUCTION
REQUIRED FOR THE PRODUCTION OF COMMODITY.
•2. TOTAL FIXED COST (TFC)
REFERS TO THOSE COST WHICH DO NOT VARY DIRECTLY WITH THE LEVEL OF OUTPUT.
•3. TOTAL VARIABLE COST (TVC)
REFERS TO THOSE COST WHICH VARY DIRECTLY WITH THE LEVEL OF OUTPUT.

6. SHORT RUN COSTS
1. TOTAL COST (TC)
TC = TFC + TVC
2. TOTAL FIXED COST (TFC)
TFC= TC-TVC
3. TOTAL VARIABLE COST (TVC)
TVC= TC-TFC

8. DISTINGUISH BETWEEN FIXED COSTS AND VARIABLE COSTS
FIXED COSTS (FC)
•1. FC DO NOT INCREASE OR DECREASE WITH
INCREASE OR DECREASE IN LEVEL OF OUTPUT.
•2. FC ARE COSTS OF FIXED FACTORS WHICH
CANNOT BE CHANGED DURING SHORT PERIOD.
•3. FC CAN NEVER BE ZERO EVEN WHEN
PRODUCTION IS STOPPED.
•4. PRODUCTION MAY CONTINUE EVEN AT THE
LOSS OF FC DURING SHORT PERIOD.
•5. FC CURVE IS PARALLEL TO X-AXIS.
VARIABLE COSTS (VC)
•1. VC CHANGE WITH CHANGES IN THE LEVEL OF
OUTPUT.
•2. VC ARE COSTS OF VARIABLE FACTORS CAPABLE
OF BEING CHANGED DURING SHORT PERIOD.
•3. VC IS ZERO WHEN PRODUCTION IS STOPPED.
•4. A FIRM CONTINUES PRODUCTION ONLY WHEN VC
ARE MET.
•5. VC CURVE MOVES UP FROM LEFT TO THE RIGHT.

9. •1. AVERAGE COST (AC)/AVERAGE TOTAL COST (ATC)
REFERS TO PER UNIT TOTAL COST OF PRODUCTION.
AC = TC/Q
•2. AVERAGE FIXED COST (AFC)
REFERS TO PER UNIT OF FIXED COST OF OUTPUT.
AFC= TFC/Q
•3. AVERAGE VARIABLE COST (AVC)
REFERS TO PER UNIT VARIABLE COST OF PRODUCTION.
AVC= TVC/Q

11. MARGINAL COST
IT REFERS TO ADDITIONAL TO TOTAL
COST WHEN ONE MORE UNIT OF
OUTPUT IS PRODUCED.
MC=
Δ????????????
Δ??????
MC
N= TC
N–TC
N-1
MC
N= TVC
N–TVC
N-1

12. Relation ship between….

13. Output TFC TVC TC AFC AVC AC MC
0 100 0 100 - - - -
1 100 50 150 100 50 150 50
2 100 70 170 50 35 85 20
3 100 80 180 33.3426.6760 10
4 100 105 205 25 26.2551.2525
5 100 135 235 20 27 47 30
6 100 170 270 16.6728.3445 35
Cost schedule

14. All costs are variable in the long run. There is
only AVC in LR, since all factors are variable.
Long Run Cost Curve

15. Economies of Scale:
Economies of scaleare the cost advantages that a firm obtains
due to expansion. Diseconomies is the opposite.
Two types:
1. Pecuniary Economies of Scale:
Paying low prices because of buying in large Quantity.
2.Real Economies of Scale:
Refers to reduction in physical quantities of input , per
unit of output when the size of the firm increases, as a result input
cost minimized.

16. 1.Internal Economies:
It is a condition which brings about a decrease in LRAC of the
firm because of changes happening within the firm.
2.External Economies:
It is a condition which brings about a decrease in LRAC of the
firm because of changes happening outside the firm.
E.g. Taxation policies of government
Diseconomies: