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Understanding Cost Concepts in Economics

Cost refers to the expenditure incurred by producers on both factor inputs and non-factor inputs to produce a given output. There are explicit costs for hiring factor inputs from the market and implicit costs for using self-owned inputs. In the short run, costs are classified as fixed or variable depending on whether they are associated with fixed or variable factors of production. Total cost is the sum of total fixed cost and total variable cost. Marginal cost is the change in total cost from producing an additional unit of output.

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Justin D'souza
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35 views14 pages

Understanding Cost Concepts in Economics

Cost refers to the expenditure incurred by producers on both factor inputs and non-factor inputs to produce a given output. There are explicit costs for hiring factor inputs from the market and implicit costs for using self-owned inputs. In the short run, costs are classified as fixed or variable depending on whether they are associated with fixed or variable factors of production. Total cost is the sum of total fixed cost and total variable cost. Marginal cost is the change in total cost from producing an additional unit of output.

Uploaded by

Justin D'souza
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

Concepts Of Costs

Concepts of Costs

Cost refers to the expenditure


incurred by the producer
( explicitly or implicitly ) on the
factor as well as non- factor inputs
for a given output of a commodity .
EXPILCT AND IMPLICT COST

COST

EXPLICIT COST IMPLICIT COST

Cost of hiring inputs from the


Costs of using self owned
market
inputs

Payments made by a firm to others for Market value of self – owned inputs in
hiring inputs from the market their next best alternative use
Short Run Costs

Short run is a period lf time


during which some factors are
fixed and some are variable .

TC = TFC + TVC
FIXED COSTS
Costs related to the use of fixed
factors known as fixed costs
Variable Costs

Variable costs are those costs


which are related to the use of
the variable factors
AVERAGE COST

Cost per unit of output is


called average cost .
AC = TC/Q
FIXED AND VARIABLE COMPONENTS
OF AC
AC = AFC + AVC
1) Average Fixed Cost : Average fixed cost is the fixed cost per
unit of output

AFC = TFC/Q
2) Average variable cost : Average variable cost is the variable
cost per unit of output
AVC = TVC/Q
MARGINAL COST

Marginal cost is the change in total cost when an


additional unit of output is produced
MCn = TCn – TCn -1

MC = ∆TC/∆Q
Relation Between Average and
Marginal Cost

1) When AC falls , MC is lower than AC


2) When AC Rises , mc is greater than AC
3) When AC does not change , MC is equal to AC
Relation between Total Cost Marginal
Cost
1) Marginal cost is estimated as the difference between total cost
of two successive units of the output . Thus
MCn = TCn – TCn-1
2) When MC is diminishing , TC increases at diminishing rate
3) When MC is rising , TC increases at increasing rate .
4) When MC reaches its lowest point TC stops increasing at a
decreasing rate .
IMPORTANT FORMULAE
 TC= TFC+TVC
 TC= AC× Q
 TVC= TC-TFC
 TVC= AVC×Q
 TVC=∑MC
 TFC=AFC×Q
 TFC=TC-TVC
 AC= TC/Q
 AC = AVC+AFC
 AVC= TVC/Q
 AVC= AC-AFC
 AFC=TFC/Q
 AFC=AC-AVC
 MC=TCn-TCn-1
 MC= TVCn-TVCn-1

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