Professional Documents
Culture Documents
Presented By-Trilok, Jaswant, Girish, Lalit, Mohit
Presented By-Trilok, Jaswant, Girish, Lalit, Mohit
PRESENTED BY-
TRILOK,JASWANT,GIRISH,
LALIT,MOHIT
INTRODUCTION
Production decisions are not possible without their
respective cost considerations. The firm will have
to analyze these sacrifices or costs whenever it
decides to use the resources.
Cost and revenue are the two major factors with
which the profit-maximizing firms need to deal
carefully. It is the difference between revenue and
cost that determines the firm’s overall
profitability. From the decision making point of
view, cost is even more important than revenue
because the firm can influence cost more easily
than revenue.
DEFINITION
The total spent for goods or services including
money and time and labor.
TYPES OF COSTS-
(1.) Economic Cost: Also known as the
"opportunity cost" is a payment made to obtain
the services of a resource which is at least equal
to what that resource can earn elsewhere.
cont.
(2.)Opportunity cost: It is the net return that
could be realized if a resource were put to its next
best use. It is "what we give up" from "the road not
taken."
(3.) Implicit costs: The monetary income that a
firm gives up when it uses a resource that it owns
rather than buying it from the market. In other words
implicit costs are opportunity costs of owner owned
resources including the services of the entrepreneur-
costs that are not paid but must be taken into account
to estimate the total cost
(4.) Explicit costs: The monetary payment a
firm must make to an outsider to obtain a resource.
cont.
(5.)Fixed costs: Costs of inputs that do not change in a
given period known as the short run.
(6.) Variable costs: Cost of inputs that can change
even in the short run.
(7.) Total costs: The costs of all resources paid
(explicit) and not paid (implicit) .
(8.)Relevant costs: These are costs that are
relevant with respect to a particular decision. A
relevant cost for a particular decision is one that
changes if an alternative course of action is
taken. Relevant costs are also called differential
costs. Relevant costs are decision specific,
meaning that a relevant cost may be important in
one situation but irrelevant in another. They are
also called incremental costs by accountants.
cont.
(9.) Sunk costs: These are costs that were
incurred in the past. Sunk costs are irrelevant for
decisions, because they cannot be changed. Sunk
costs are unrecoverable past expenditures. These
should not normally be taken into account when
determining whether to continue a project or
abandon it, because they cannot be recovered
either way.
(10.) Social costs: These costs are adverse
impacts on human beings, their property and
welfare that cannot be compensated through the
legal system. Social costs also termed "social
externalities”. Adverse effects on property values,
community image, and aesthetics, as well as the
increase of noise, odor, and traffic all contribute
to social costs.
cont.
(11.) Environmental costs: These are the
costs of environmental degradation that cannot be
easily measured or remedied, are difficult to
value, and are not subject to legal liability. To
truly capture all of the important life-cycle cost
elements, some people advocate assessing the
upstream and downstream environmental costs of
resource use, pollution, and waste generated by
providing goods and services.
(12.) Contingent costs: These are costs that
might or might not be incurred at some point in
the future. Examples include the costs of
remediation unknown or future releases of
pollutants, such as leaks from currently operating
municipal landfills.
cont.
(13.) Semi-variable costs: These costs have
fixed and variable elements. E.g. a person working
for the company may have a fixed salary but may
also earn commission on sales.
(14.) Urgent costs and postponable
costs: Urgent costs are those that must be
incurred so that the operations of the firm continue.
Those costs whose postponement does not affect
the operational efficiency of the firm, are known as
postponable costs.
(15.)INCREMENTAL COSTS: The incremental
costs are the additions to costs resulting from a
change in the nature and level of business activity.
cont.
(16.)Controllable costs: Controllable costs
are those which are capable of being controlled or
regulated by executive vigilance and, therefore ,
can be used for assessing executive efficiency.
(17.)Non-controllable costs: Non-
controllable costs are those which cannot be
subjected to administrative control and
supervision.
(18.)Shutdown costs: Shutdown costs are
those which the firm incurs if it temporarily stops
it operations.
(19.)Abandonment costs: Abandonment
costs are the costs of retiring altogether a fixed
asset from use.
Relationship Between
Production and Cost
Marginal Cost has Total
Input TVC
been added to
(L) Q MP (wL) MC
the table.
0 0 0
When MP is 1 1,000 1,000 500 0.50
increasing, MC is 2 3,000 2,000 1,000 0.25
decreasing. 3 6,000 3,000 1,500 0.17
When MP is 4 8,000 2,000 2,000 0.25
decreasing, MC is 5 9,000 1,000 2,500 0.50
increasing. 6 9,500 500 3,000 1.00
7 9,850 350 3,500 1.43
8 10,000 150 4,000 3.33
9 9,850 -150 4,500
10
Relationship Between
Production and Cost
Plotting TP and TVC illustrates that they are
mirror images of each other.
When TP increases at an increasing rate, TVC
increases at a decreasing rate.
11
DETERMINANTS OF A COST
FUNCTION
There are several factors that influence the cost.
Cost function expresses the relationship between
cost and its determinants, like the size of plant,
level of output, input prices, technology, etc. In a
mathematical form it can be expressed as,
C=f (S, O, P, T…)
0 1000 0 1000 - - - -
10 1000 400 1400 100 40 140 40
20 1000 700 1700 50.0 35 85 30
30 1000 930 1930 33.3 31 64.3 23
40 1000 1100 2100 25.0 27.5 52.5 17
50 1000 1400 2400 20.0 28 48 30
60 1000 1900 2900 16.7 31.7 48.4 50
70 1000 2500 3500 14.3 35.7 50 60
Pesos
TC
(Total Cost)
TVC
(Total Variable Cost)
TFC
(Total Fixed Cost)
0 Q
“TOTAL” COST CURVES
Pesos
AFC=TFC/Q.
As more output is produced, the
Average Fixed Cost decreases.
AFC
(Average Fixed Cost)
0 Q
Pesos The Marginal Cost curve passes
through the minimum point of
the AVC curve.
MC (Marginal Cost)
It is also U-shaped. First it
decreases, reaches a minimum AVC
and then increases. (Average Variable Cost)
Minimum AVC
0 q1 Q
Pesos MC
AC
AVC
AFC
0 q1 Q
Important Observations
AFC declines steadily over the range of
production.
When MC = AVC, AVC is at a minimum.
When MC < AVC, AVC is falling.
When MC > AVC, AVC is rising.
The same three rules apply for average
cost (AC) as for AVC.
The Short-Run Cost Function
LAC
SAC1
0 Q
q0
Building a larger sized plant (size
2) will result in a lower average
COST cost of producing q0
LAC
SAC1
SAC2
0 Q
q0
Likewise, a larger sized plant (size 3)
COST will result to a lower average cost of
producing q1
SAC1 LAC
SAC2
SAC3
0 Q
q0 q1
COST
LAC
SAC1
SAC2
0 Q
LAC
SAC1
SAC2