cost
DESCRIPTION
TRANSCRIPT
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COSTMADE BY : SYED
ARIF AHMAD
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TYPES OF COST
EXPLIT COST
IMPLICIT COST
PRIVATE COST
SOCIAL COST
MONEY COST
REAL COST
OPPORTUNITY COST
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What do mean by COST???Production and cost are two side of a same coin. There can not be any production without incurring cost and at the same time cost without production has no economic significance.
1) SHORT RUN
2) LONG RUN
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Short Versus Long RunThe short run is a period of time sufficiently
short that only some of the variables can be changed.
The long run is a period of time that all variables can be changed.
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SHORT RUN COST
Total cost = Total fixed cost + Total variable cost
MCn = TCn – TCn-1
AC = AFC +AVC
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Variable CostsThese costs exist only if production occurs.
E.g., fuel for tractor, seed, etc.
Fixed CostsThese cost exist whether production occurs or not.
In the long-run there are no fixed costs.
Can be both cash and non-cash expenses.
E.g., depreciation on tractors and buildings, etc.
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Cont...Sunk Costs
Is an expenditure that cannot be recovered.In essence, it becomes part of fixed costs.E.g., pre-harvest costs.
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Cost ConceptsTotal Fixed Costs (TFC)
The summation of all fixed and sunk costs to production.
Total Variable Costs (TVC)The summation of all variable costs to
production.Total Costs (TC)
The summation of total fixed and total variable costs.
TC=TFC+TVC
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Cost Concepts Cont.Average Fixed Costs (AFC)
The total fixed costs divided by output.Average Variable Costs (AVC)
The total variable costs divided by output.Average Total Costs (ATC)
The total costs divided by output.The summation of average fixed costs and
average variable costs, i.e., ATC=AFC+AVC.
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Cost Concepts Cont.Marginal Costs
The change in total costs divided by the change in output. TC/Y
The change in total variable costs divided by the change in output. TVC/Y
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Side Note on Marginal CostHow can marginal cost equal both the change
in total cost divided by the change in output and the change in total variable cost divided by the change in output when variable costs are not equal to total costs?Short answer: fixed costs do not change.
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Graphical Representation of Cost Concepts`
Y
TC
TVC
TFC
y
x0
COSt
output
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TOTAL FIXED COSTEg :- rent
TFC
output xo
cost
y
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TOTAL VARIABLE COST Y TVC
O QTY X
(IT IS DUE TO LAW OF VARIABLE PROPORTION)
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TOTAL COSTTFC + TVC
TC
TVC
TFC
XQTY O
Y
COST
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MARGINAL COST
MC
X O QTY
Y
COST
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AVERAGE FIXED COSTAFC = TFC/OUTPUTOptimum combination b/t fixed & variable
factors.It will not touch Y & X axis, it tends towards
zero, but never reaches zero. y
cost
o outpu
t
X
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Contd…output TFC AFC
0 100 0
1 100 100
2 100 50
3 100 33.3
4 100 25
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AVERAGE VARIABLE COSTAVC = TVC /OUTPUT
AVC Y
COST
O OUTPUTX
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AVERAGE COSTAC =TC/OUTPUT
AC
Y
COST
QTY XO
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Relationship between AC & AVC
0
y
x
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RELATIONSHIP BETWEEN AC & AVC
Ac lies above AVC
Minimum point of AVC comes before miminum point of AC
Diffrence between Ac & AVC is AFC
AVC connot intersect AC because AFC never becomes 0.
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RELATIONSHIP BETWEEN AC & MC
AC
y
x
MC
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Relationship between AC & MC
When AC decreases MC is less then AC
When AC increases MC is more than AC
MC intersect AC at its minimum point
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Long-Run Average CostsThe long run average cost (LRAC) curve is
the envelope of the short run average cost curves when the size of the operation is allowed to increase or decrease.
Note that a short run average cost curve exists for every possible farm size, as defined by the amount of fixed input available.
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LONG RUN COST CURVE
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Due to variable proportion & optimum combination between fixed & variable factor, U shape is form
& for LRAC :- Law of Returns to Scale