E-LESSON-9 MICRO ECONOMICS

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BBA/BCOM 2 All right are reserved with CU-IDOL Micro economics Course Code: BBA103/BCM103 Semester: First e-Lesson: 9 SLM Unit: 9 www.cuidol.in Unit-9(BBA103/BCM-103)

MICRO ECONOMICS 33 OBJECTIVES INTRODUCTION To enable the students to describe the In this unit we are going to learn about working of an economy at the micro level. meaning of cost and its types To analyze and understand the behavior of Under this you will learn and understand consumers in the markets. the long run and short run cost curves, relationship between Cost and To evaluate, analyze and interpret factor production curves affecting the behavior of producers INSTITUTE OF DISTANACEll ArNigDhtOaNrLeINreEsLeErAvRedNIwNiGth CU-IDOL www.cuidol.in Unit-9(BBA103/BCM-103)

TOPICS TO BE COVERED 4 Introduction of cost. Types of cost. Short Run cost curve. Long run cost curve. Relationship between Cost and production curves. www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Meaning of Cost 5 All right are reserved with CU-IDOL The term ‘cost’ is most widely used as the ‘money cost’ of production which relates to the money expenditure of a firm on: (i) Wages and salaries paid to the labour. (ii) Payment incurred on machinery and equipment. (iii) Payment for materials, power, light, fuel, transportation etc. (iv) Payments for rent and insurance. (v) Payments to Government by way of taxes. Money costs therefore relate to money outlays by a firm or factors of a production which enable the firm to produce and sell a product. It should be remembered that every producer is interested in money costs. Besides money cost there are other costs that are equally important to take decisions on various matters. www.cuidol.in Unit-9(BBA103/BCM-103)

Types of Cost 6  Fixed Costs (FC) The costs which don’t vary with changing output. Fixed costs might include the cost of building a factory, insurance and legal bills. Even if your output changes or you don’t produce anything, your fixed costs stay the same.  Variable Costs (VC) Costs which depend on the output produced. For example, if you produce more cars, you have to use more raw materials such as metal. This is a variable cost  Semi-Variable Cost. Labour might be a semi-variable cost. If you produce more cars, you need to employ more workers; this is a variable cost. However, even if you didn’t produce any cars, you may still need some workers to look after an empty factory.  Total Costs (TC) = Fixed + Variable Costs. www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

 Marginal Costs – Marginal cost is the cost of producing an extra unit. If the total cost of 3 units is 1550, 7 and the total cost of 4 units is 1900. The marginal cost of the 4th unit is 350  Opportunity Cost – Opportunity cost is the next best alternative foregone. If you invest £1million in developing a cure for pancreatic cancer, the opportunity cost is that you can’t use that money to invest in developing a cure for skin cancer.  Economic Cost. Economic cost includes both the actual direct costs (accounting costs) plus the opportunity cost. For example, if you take time off work to a training scheme. You may lose a weeks pay of £350, plus also have to pay the direct cost of £200. Thus the total economic cost = £550.  Accounting Costs – this is the monetary outlay for producing a certain good. Accounting costs will include your variable and fixed costs you have to pay. www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Determinant to Cost 8 The cost of producing any given amount of output by a firm depends on two main factors: (a) The Quantities of Resources and Their Combinations: The cost to the firm of producing any output evidently depends upon the physical quantities of actual resources or services—labour, material, machine hours, and so forth—used in production. Thus, the cost of producing a tons of steel depends upon the quantities of iron ore, limestone, coal, blast-furnace, etc. used in the production. (b) Techniques of Productions: A firm can produce at low cost when it produces with the new and improved techniques of production. Production with the old and outdated technique involves higher cost. The profit maximization requires the use of the particular technique of production which would allow the optimum combination of factors. In the short period the optimum combination for any given level of output is the least-cost combination possible with the fixed factor units. But this may not be the absolute optimum combination if all the factors could be adjusted. Over the longer period, all factors can be varied, and so the firm is free to select the production technique of factors. www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Short Run Cost 9  The Short Run cost  The short run is a time frame in which the quantity of one or more resources used in production is fixed.  For most firms, the capital, is fixed in the short run.  Other resources used by the firm (such as labor, raw materials, and energy) can be changed in the short run.  Total Costs  The sum of total fixed costs and total variable costs  Fixed Costs  Costs that do not vary with output  Variable Costs  Costs that vary with the rate of production TC = TFC+TVC www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

SHORT RUN COST 10 • Average Total Costs (ATC) • Average Variable Costs (AVC) Total variable costs (TVC) Output (Q) Average variable costs (AVC) = • Average Fixed Costs (AFC) www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Marginal Cost 11  It is the addition to total cost incurred by increasing output by one unit. In other words, it is the extra cost of producing on extra unit of output.  Marginal cost represents the incremental costs incurred when producing additional units of a good or service. It is calculated by taking the total change in the cost of producing more goods and dividing that by the change in the number of goods produced.  The usual variable costs included in the calculation are labor and materials, plus the estimated increases in fixed costs (if any), such as administration, overhead, and selling expenses.  The marginal cost formula can be used in financial modeling to optimize the generation of cash flow .  The Marginal Cost Formula is: Marginal Cost = (Change in Costs) / (Change in Quantity) www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Total cost curve 12 www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Marginal cost and 13 average cost curves www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Long run Average cost 14 curves www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Long –run average cost 15 curves www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Long –run marginal cost 16 curves www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Relationship between Cost 17 and production curves. www.cuidol.in Unit-9(BBA103/BCM-103) All right are reserved with CU-IDOL

Multiple Choice Questions 18 1. Opportunity cost is: (b) Total cost (a) Direct cost (d) Cost of foregone opportunity (c) Accounting cost 2. As output increases, average fixed cost: (b) Starts falling (a) Remains constant (d) None (c) Start rising Answers: 1.(d) 2.(b) www.cuidol.in Unit-9(BBA103/ BCM103) All right are reserved with CU-IDOL

Multiple Choice Questions 19 3. Economic cost excludes: (a) Accounting cost + explicit cost (b) Accounting cost + implicit cost (c) Explicit cost + Implicit cost (d) Accounting cost + opportunity cost 4. Which of the following cost curves is never ‘U’ shaped? (a) Average cost curve (b) Marginal cost curve (c) Total cost curve (d) Fixed cost curve Answers: 3.(a) 4.(d) www.cuidol.in Unit-9(BBA103/ BCM103) All right are reserved with CU-IDOL

Summary 20  Costs enter into almost every business decision and it is important to use the right analysis of cost. Different business problems call for different kinds of costs such as future and past costs, incremental and sunk cost, out of pocket and book costs, replacement and historical cost etc.  Fixed costs are those costs which do not very with the change in the level of output in the short run. Variable costs change with output levels.  There are short run average fixed cost and variable cost as well as long run average costs.  Total cost is the sum of total of the explicit plus implicit expenditure. Average cost is the cost per unit of output. Marginal cost is the extra cost of producing one additional unit. www.cuidol.in Unit-9(BBA103/ BCM103) All right are reserved with CU-IDOL

FAQ’S 21 Q1.Define Opportunity Cost? Answer::The return from the second best use of the fi rm’s resources which the fi rm forgoes in order to avail itself of the return from the best use of the resources. Q2. Why is Average cost curve U shaped ? Ans :Average total cost is U-shaped. At low output: fixed costs are high and variable costs are low per unit. At high output: fixed costs are low and variable costs are relatively higher per unit. Q3. Distinguish between average total cost and marginal cost? Answer :“Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced.”“Marginal cost tells us the increase in total cost that arises from producing an additional unit of output. www.cuidol.in Unit-9(BBA103/ BCM103) All right are reserved with CU-IDOL

REFERENCES 22 1. Dwivedi D.N. , Managerial Economic, Vikas Publications, New Delhi. 2. Mithani D.M. , Managerial Economics Theory and Applications, Himalaya Publication, Mumbai. 3. https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study- resources/f1/technical-articles/introduction-to-microeconomics.html 4. https://www.toppr.com/guides/economics/microeconomics-and-macroeconomics/introduction-to- microeconomics/ 5. http://wikieducator.org/Introduction_to_Economics_and_Microeconomic_Theory www.cuidol.in Unit-9(BBA103/ BCM103) All right are reserved with CU-IDOL

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