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Cost Notes

The document discusses the concept of cost in microeconomics, detailing various types of costs incurred by firms in production, including total cost, fixed cost, variable cost, average cost, marginal cost, sunk cost, and opportunity cost. It provides definitions, formulas, and relationships between these costs, emphasizing their significance in production decisions. Additionally, it highlights the importance of understanding these costs for effective economic analysis.

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2 views

Cost Notes

The document discusses the concept of cost in microeconomics, detailing various types of costs incurred by firms in production, including total cost, fixed cost, variable cost, average cost, marginal cost, sunk cost, and opportunity cost. It provides definitions, formulas, and relationships between these costs, emphasizing their significance in production decisions. Additionally, it highlights the importance of understanding these costs for effective economic analysis.

Uploaded by

technorcode01
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FOP: Land Labour Capital Organisation

Cost of production: Rent Wages Interest Profit

*Cost in Microeconomics*

Cost, in the context of microeconomics, refers to the expenses incurred by a firm in the process of
producing goods or services. It encompasses the various expenditures associated with acquiring and
utilizing resources, such as labor, capital, and raw materials.

*Key Cost Concepts:*

1. *Total Cost (TC):* FOP are land labour capital and organization, and Cost of production include rent
wages interest and profit

- Definition: The sum of total fixed cost (TFC) and total variable cost (TVC). It represents the overall
expenditure incurred in producing a specific level of output.

- Formula: TC = TFC + TVC

- Example: If a firm spends $10,000 on rent (TFC) and $5,000 on labor (TVC), the total cost is $15,000.

2. *Fixed Cost (FC):*

- Definition: Costs that remain constant regardless of the level of output produced. These costs must be
incurred even if no output is produced.

- Examples: Rent, insurance, property taxes, salaries of permanent employees.

- Relationship: TFC remains constant as output changes.

3. *Variable Cost (VC):*

- Definition: Costs that vary directly with the level of output produced. As output increases, variable
costs also increase, and vice versa.

- Examples: Raw materials, wages for hourly workers, utilities.

- Relationship: TVC increases as output increases.

4. *Average Fixed Cost (AFC):*


- Definition: The fixed cost per unit of output. It is calculated by dividing the total fixed cost by the
quantity of output.

- Formula: AFC = TFC / Q

- Relationship: AFC declines as output increases.

5. *Average Variable Cost (AVC):*

- Definition: The variable cost per unit of output. It is calculated by dividing the total variable cost by
the quantity of output.

- Formula: AVC = TVC / Q

- Relationship: AVC may initially decrease and then increase as output increases, due to diminishing
returns.

6. *Average Cost (AC) or Average Total Cost (ATC):*

- Definition: The total cost per unit of output. It is calculated by dividing the total cost by the quantity
of output.

- Formula: AC = TC / Q or AC = AFC + AVC

- Relationship: AC is U-shaped, reflecting the initial decline and subsequent increase in AVC.

7. *Marginal Cost (MC):*

- Definition: The additional cost incurred in producing one more unit of output. It is the change in total
cost divided by the change in output.

- Formula: MC = ΔTC / ΔQ

- Relationship: MC intersects the AVC and AC curves at their minimum points.

8. *Sunk Cost:*

- Definition: Costs that have already been incurred and cannot be recovered. These costs should not
influence future decisions.

- Example: Money spent on a non-refundable deposit for a piece of equipment.

9. *Opportunity Cost:*
- Definition: The value of the next best alternative forgone when a particular choice is made. It
represents the cost of the missed opportunity.

- Example: The opportunity cost of attending college is the income that could have been earned by
working instead.

*Relationship of Costs:*

- *TC = TFC + TVC*

- *AC = AFC + AVC*

- MC intersects AVC and AC at their minimum points.

Visual Representation:

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