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COST

Cost ppt economics class 11

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434 views25 pages

COST

Cost ppt economics class 11

Uploaded by

choudharyanjali77650
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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COST

PREPARED BY
MR.PURKHA RAM PRAJAPATI (PGT ECO.)
KV NASIRABAD
Table of Contents
• Cost
• Explicit Cost
• Implicit Cost
• Selling Cost
• Production Cost
• Short Run Cost
• Total variable cost (TVC)
• Average Cost/Average Total Cost
• Relationship between AC, AFC, AVCMarginal Cost
• Relationship between AC and MC
• Relationship between TC/TVC and MC
•
COST
• Cost refers to the expenditure incurred by a producer on factor input
as well as on new factor input for a given output of a commodity
• Total Cost = Explicit Cost+ Implicit Cost

• Cost is always measured as opportunity cost because cost of


producing a given amount of output is to be measured in terms of the
sacrifices made in the producing that output
• Explicit Cost
• It is the opportunity cost of hiring purchasing input from market'in
short it is the payment made by a firm to other for hiring purchasing
input from the market. For example, wages paid to the workers
payment of electricity bill Explicit cost is also known as actual cost or
outlay cost or absolute cost

• Implicit Cost
• It is the opportunity cost of using self-owned inputs it is the market
value of self-owned inputs in their next best alternative use. For
example, estimated rent of entrepreneurs on building estimated
interest on entrepreneur's owncapital salary for services of
entrepreneur etc.
• Selling Cost
• It refers to expenditure incurred by the producer to promote sale of the
commodity For example, expenses on advertisement.

• Production Cost
• It refers to the expenditure incurred by a producer on the inputs for producing a
given level of output.

• Short Run Cost


• Short run is a period of time during which some factors are fixed and some are
variable. It has two components.
• fixed cost and variable cost.
• TC=TVC+TFC
• Total Fixed Cost
• It is the sum total of expenditure incurred by the producer on hiring/purchasing
fixed factors of production. It is also known as indirect supplementary or
overhead cost. TFV remains constant during short run. It does not change with
increase or decrease in output.
• For Example: Expenditure on plane & machines, salaries of permanent staff etc,
rent of factory.
• Total variable cost (IVC)
• It refers to the expenditure incurred by the producer on the variable factors of
production. It changes with the change in the level of output. It is also known as
prime cost or direct cost. As output increases, TVC increases & as the output
decreases TVC decreases and when the output is zero, TVC is also zero.For
• Example: Cost of raw material, electricity expenses etc.
• TC= TVC+TFC
• TC and TVC curves have the similar shapes, the only difference between them is that
TVC starts from origin whereas TC starts above the origin
• At zero level of output, there is no variable cost, it means TC-TFC, initially TVC
increases at decreasing date because addition cost of producing every successive
unit tends to fall.
• Afterwards TVC increases at the increasing rate because MP of variable factor tends
to fall so more & more of additional cost is increased for producing every additional
unit of output.
• TC is parallel to TVC because the variable distance between them is TFC (TC-TVC)
which is constant
• FC is constant at all the level of output
• AFC curve is rectangular hyperbola. It we take any point on AFC curve and
multiply AFC at that point corresponding level of output, the product
(AFCxQ=TFC) shall always be the same
• AVC curve is U-shaped accordance with the law of variable proportions. It falls so
long as returns to factors are increasing AVC nses when returns to a factor starts
decreasing
• Average Cost/Average Total Cost
• Average cost is the cost per unit of output product. It is also called unit cost of
production.
• Average fixed cost is the fixed cost of per unit of output.
Relationship between TC and MC
The main points of relationship
between TC and MC are:
1. MCn = TCn – TCn-1.

2. When TC rises at a diminishing


rate, MC declines.

3. When the rate of increase in TC


stops diminishing. MC is at its
minimum point, i.e. point ‘E’ in the Fig.

4. When the rate of increase in total


cost starts rising, the marginal cost is
increasing.
Relationship between Average Cost (AC) and Marginal Cost (MC).

Output TC MC
AC (₹) Phase
(Units) (₹) (₹)
0 12 -- --
1 18 18 6
I (MC < AC)
2 22 11 4
3 27 9 5
4 36 9 9 II (MC = AC)
5 47 9.40 11 III (MC>AC)

1. When MC < AC, AC falls.


2. When MC = AC, AC is constant and at its
minimum point.
3. When MC > AC, AC rises.
Relationship between Average Variable Cost (AVC) and Marginal Cost (MC).

Average Variable Cost (AVC) and Marginal Cost (MC).

Output TVC
AVC (₹) MC (₹) Phase
(Units) (₹)
0 0 -- -- I (MC < AVC)
1 6 6 6
2 10 5 4
3 15 5 5 II (MC = AVC)

4 24 6 9 III (MC>VAC)
5 35 7 11

1. When MC < AVC, AVC falls.


2. When MC = AVC, AVC is constant and at its minimum point.
3. When MC > AVC, AVC rises.
Relationship between Average Cost (AC) and Average Variable Cost (AVC) and Marginal Cost (MC).

.
Outp
ut TVC AC AVC MC
(Unit (₹) (₹) (₹) (in ₹)
s)
0 0 -- -- --
1 6 18 6 6
2 10 11 5 4
3 15 9 5 5
4 24 9 6 9
5 35 9.40 7 11
VARIOUS FORMULAS FOR
CALCULATING DIFFERENT COST
• TC=TFC+TVC , AC*Q, ∑MC
• TVC= TC-TFC, AVC*Q, ∑MC
• TFC = TC-TVC, TFC*Q
• AC= TC/Q, AFC+AVC,
• AVC=TVC/Q, AC-AFC
• AFC=TFC/Q ,AC-AVC
• MC=TVCn-TVCn-1, ΔTC/ΔQ, ΔTVC/ΔQ
MR. PURKHA RAM (PGT ECO.)
KENDRIYA VIDYALAYA
NASIRABAD

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