BBA,B.ComMicro Economics - UNIT XI - THEORY OF COSTS

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2 THEORY OF COST www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

COST CONCEPTS – TYPES OF COSTS 3 • Total Cost - Cost incurred by the firm in producing a given level of output. • Fixed Cost - Cost incurred on the fixed factors of production • Variable Cost - Cost incurred on the variable factors of production • Marginal Cost – Cost incurred in producing an additional unit of output. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

\\ 4 COST CONCEPTS – TYPES OF COSTS • Average Cost - Total cost divided by units of output • Opportunity Cost – When a factor of production is employed in one use, the production of other good where it can be used is sacrificed. • Social Cost – Cost incurred by the society as a whole for producing a commodity • Private Cost – Cost incurred by an individual firm for producing a commodity www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

COST CONCEPTS – TYPES OF COSTS 5 • Explicit Costs – Cost incurred on the factors of production hired from the market • Implicit Costs – Cost incurred by the business firms on the factors of production owned by it. • Real Cost - It refers to the actual quantities of various factors used in producing a commodity. • Money Cost - Cost of production expressed in terms of money. • Economic Cost – It refers to the total cost of production incurred by a firm for producing a commodity. It includes both implicit & explicit cost www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

COST CONCEPTS – TYPES OF COSTS 6 • Accounting Cost – It is concerned only with explicit cost. It consists of only those factor payments which are actually made. • Historical Cost – It refers to the actual cost incurred for producing a commodity or service. • Replacement Cost – It refers to the cost of replacing the assets i.e. the value of asset in the current period. • Social Cost – The cost incurred by the society as a whole for producing a commodity is known as social cost. • Incremental Cost – It refers to the change in total cost due to a policy decision implemented by the management. www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

COST CONCEPTS – TYPES OF COSTS 7 • Sunk Cost – The costs which are incurred already & which cannot be recovered are called sunk cost. • Future Cost – The costs which are incurred on the basis of forecasts. • Opportunity Cost – It is the next best alternative that is scarified www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

NUMERICAL FOR CALCULATION 8 Total Cost (TC) = TVC + TFC AFC = TFC / Q AVC = TVC / Q ATC = TC / Q or (TFC + TVC) / Q MC = TCn – TCn-1 www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

NUMERICAL FOR CALCULATION 9 Units of TFC TVC TC AVC AFC AC Output 00 30 0 30 0 30 60 (Q) 30 30 60 30 0 30 40 All right are reserved with CU-IDOL 1 30 52 2 30 65 3 30 90 4 30 120 5 30 160 6 30 210 7 30 270 8 30 340 9 10 Unit-1(MAP-607) www.cuidol.in

10 SHORT RUN COST CURVES www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

11 SHORT RUN COST CURVES www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

LONG RUN AVERAGE COST CURVES (LAC) 12 www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

NUMERICALS 13 1. Given TFC as Rs. 150. Calculate TC, ATC, AFC and MC from the following data: Units 1 2 3 4 5 6 TVC 35 60 80 110 160 230 2. Given TFC as Rs. 100. Calculate TC, AFC, AVC & MC from the following data: Units 1 234567 TVC 0 20 25 40 50 80 120 www.cuidol.in Unit-1(MAP-607) All right are reserved with CU-IDOL

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