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    Manish Gupta
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    The document discusses factors that affect costs of production, including explicit costs for hired factors and implicit costs for owned factors used internally. It explains concepts like total, fixed, variable, average, and marginal costs, and how they are related and depicted graphically. It also covers the differences between short-run and long-run costs, how costs change with scale, and applications like break-even analysis.

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    The document discusses factors that affect costs of production, including explicit costs for hired factors and implicit costs for owned factors used internally. It explains concepts like total, fixed, variable, average, and marginal costs, and how they are related and depicted graphically. It also covers the differences between short-run and long-run costs, how costs change with scale, and applications like break-even analysis.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
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    Download as ppt, pdf, or txt
    91 views23 pages

    Cost

    Uploaded by

    Manish Gupta
    The document discusses factors that affect costs of production, including explicit costs for hired factors and implicit costs for owned factors used internally. It explains concepts like total, fixed, variable, average, and marginal costs, and how they are related and depicted graphically. It also covers the differences between short-run and long-run costs, how costs change with scale, and applications like break-even analysis.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
    of 23

    Costs

    Costs of
    of Production
    Production
    What factors affect costs
    What do we need to
    consider in costs
    Wherever production takes place,
    costs follow. One has to make
    payments for all factors of
    production, i.e. incur certain costs

    Cost curves show the minimum cost of


    producing various levels of output
    Explicit vs Implicit cost
    • Explicit costs are actual, out of pocket
    expenditures for factors hired or
    purchased e.g. rent.
    • Implicit costs are costs of factors owned
    by firm and used in its own production
    process.
    COSTS= EXPLICIT + IMPLICIT

    SUNK COSTS
    Time period and costs
    Short Run costs
    • Total fixed cost (TFC)– cost which firm
    incurs for fixed inputs, whether there is
    output or not. eg. Rent
    • Total variable cost (TVC) –cost incurred by
    firm for variable input eg raw material
    TOTAL COST = TFC + TVC

    Long run costs All costs are variable


    Numerical
    Q TFC TVC TC • Plot in the form of
    0 60 0 a graph.
    1 60 30
    2 60 40 • What is the shape
    3 60 45 of cost curve
    4 60 55
    5 60 75 • New image 1
    6 60 120
    FIGURE 6-7 Short-Run Total Cost, Total Variable Cost, and
    Total Fixed Cost
    Short run units costs
    Average fixed costs (AFC)=TFC/output
    Average variable costs (AVC)=TVC/output
    Average cost =Total cost/output
    AC = AVC +AFC
    Marginal cost (MC)= change in TC per unit of
    output
    (Calculate and Plot all costs on a graph……)
    Fill in blanks
    Q TC TFC TVC ATC AFC AVC MC
    0 125
    10 5
    20 10.5
    30 110
    40 255
    50 3
    60 3
    70 5
    Short run unit costs
    Shape of MC,AVC and AC
    curve
    • Why are MC, AVC and AC curve U shaped?
    • Why does AC reach its lowest point to
    right of point at which AVC curve is
    lowest?
    • Why does the MC curve intersect the AVC
    and AC curves at their respective lowest
    point?
    Long Run costs
    • In long run, all factors are variable. The firm can
    build a plant of any size.
    • The long run average cost (LAC) curve shows the
    minimum per unit cost of producing each level of
    output when any desired scale of plant can be
    built. LAC is given by a curve tangent to all SAC
    curves representing all alternative plant sizes
    that the firm can build in the long run.
    • Mathematically, LAC is envelope of SAC curves.
    Relationship Between Short-Run Average Cost Curves and the
    Long-Run Average Cost Curve
    Economies of Scale
    • Why does LAC fall in beginning
    - Economies of scale (Internal vz
    external economy)

    - Why does LAC rise eventually


    - Diseconomies of scale (internal vz
    external)
    Long-Run Average Cost and Returns to Scale
    Learning curves
    • As firm gain experience in production
    of a commodity, the average cost of
    production declines. For a given level
    of output, cost per unit decreases.
    the learning curve shows decline in
    average input cost of production with
    rising cumulative total output over
    time.
    Estimating and using cost
    functions
    • Find minimum total cost function
    given
    TC = 1000 + 10 Q _ .9Q² + .04Q³

    Find rate of output that results in


    minimum average variable cost
    Profit = Revenue -
    Cost
    Revenue concepts = TR, MR, AR

    Total Revenue (TR): The sum total of sale proceeds


    from no. of units sold. TR= P.Q
    Average Revenue: This is TR/ quantity

    Marginal Revenue: This is change in total revenue when


    there is change in quantity sold of a product. MRn =
    TRn – TRn-1.
    International applications
    of cost minimisation
    • Growing importance of international
    trade i.e. theory of comparative
    advantage
    • MNC which have production plants
    throughout the world
    International applications
    contd…
    • Ability on part of some firms to
    satisfy their needs for some skilled
    labour from abroad

    • Brain drain
    • Outsourcing trends – bpo, kpo, lpo
    Break even analysis
    • The break even point is that
    point of activity (sales volume)
    where total revenue and total
    expenses are equal. It is point of
    zero profit.
    1. Breakeven point in units
    2. Breakeven point in sales
    3. Breakeven point in percentage
    Break-Even Analysis
    • At the Break-even point TR =
    TC, but
    TR  TVC  TFC
    or
    P(Q)  AVC (Q)  TFC
    TFC
    therefore: QBEP 
    P  AVC
     (P - AVC) is known as the unit
    contribution margin.
     [1-(AVC/P)] is known as the

    contribution margin ratio and indicates


    the fraction of the price that covers
    fixed cost and profit
    Break even analysis
    • S b = TFC
    1- ( TVC/ TR)

    % b = TFC * 100
    ( P- AVC) * Q (cap)

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