SlideShare una empresa de Scribd logo
1 de 20
Descargar para leer sin conexión
Cost Concepts
Cost Concept:
   It is used for analyzing the cost of a
    project in short and long run.
Types of Cost:
   Total fixed costs (TFC)
   Average fixed costs (AFC)
   Total variable costs (TVC)
   Average variable cost (AVC)
   Total cost (TC)
   Average total cost (ATC)
   Marginal cost (MC)
Fixed Costs(FC)
Fixed Cost denotes the costs which do not
  vary with the level of production. FC is
  independent of output.
Eg: Depreciation, Interest Rate, Rent, Taxes
   Total fixed cost (TFC):
           All costs associated with the fixed input.

   Average fixed cost per unit of output:
                  AFC = TFC /Output
Variable Costs(VC)
Variable Costs is the rest of total cost, the part that
  varies as you produce more or less. It depends
  on Output.
Eg: Increase of output with labour.

   Total variable cost (TVC):
            All costs associated with the variable
      input.
   Average variable cost- cost per unit of output:
             AVC = TVC/ Output
Total costs(TC)
            The sum of total fixed costs and
 total variable costs:

                             TC = TFC +
 TVC

Average Total Cost
    Average total cost per unit of output:

        ATC =AFC + AVC
        ATC = TC/ Output
Marginal Costs

   The additional cost incurred from
    producing an additional unit of output:

            MC = ∆ TC
                 ∆ Output
            MC = ∆ TVC
                 ∆ Output
Typical Total Cost Curves




        TVC,TC is always increasing:
            First at a decreasing rate.
            Then at an increasing rate
Typical Average & Marginal Cost
Curves
   AFC is always            MC is generally
    declining at a            increasing.
    decreasing rate.         MC crosses ATC and
   ATC and AVC decline       AVC at their minimum
    at first, reach a         point.
    minimum, then            If MC is below the average
    increase at higher        value:
    levels of output.           Average value will be

   The difference               decreasing.
    between ATC and AVC      If MC is above the average
                              value:
    is equal to AFC.
                                Average value will be
                                 increasing.
Production Rules for the Short-Run
1.If expected selling price < minimum AVC (which
   implies TR < TVC):
     A loss cannot be avoided.

     Minimize loss by not producing.

     The loss will be equal to TFC.



2.If expected selling price < minimum ATC but >
  minimum AVC:
      (which implies TR > TVC but < TC)
    A loss cannot be avoided.

    Minimize loss by producing where MR = MC.

    The loss will be between 0 and TFC.
Contd…
3.If expected selling price > minimum ATC (which
  implies TR > TC):
    A profit can be made.

 Maximize profit by producing where:
                   MR = MC
Short Run Production Decisions




              SP      SP
Long Run Costs Curve:

   All costs are variable in the long run.
   There is only AVC in LR, since all factors
    are variable.
   It is also called as Planning Curve or
    Envelope or scale curve.
Production Rules for the Long-Run

1.If selling price > ATC (or TR > TC):
     Continue to produce.

     Maximize profit by producing where

     MR = MC.
2.If selling price < ATC (or TR < TC):
     There will be a continual loss.

     Sell the fixed assets to eliminate fixed costs.

     Reinvest money is a more profitable
      alternative.
Long Run Cost Curve




    Economies of scale        Diseconomies of scale
                         M




                             M-optimum level of production
Economies of Scale:
  Economies of scale are the cost
   advantages that a firm obtains due to
   expansion. Diseconomies is the opposite.
 Two types:

1. Pecuniary Economies of Scale:
          Paying low prices because of buying
   in large Quantity.
2.Real Economies of Scale:
            Refers to reduction in physical
  quantities of input , per unit of output
  when the size of the firm increases, as a
  result input cost minimized.
Diseconomies:
1.Internal Economies: It is a condition
  which brings about a decrease in LRAC of
  the firm because of changes happening
  within the firm.
e.g.As a company's scope increases, it may
  have to distribute its goods and services in
  progressively more dispersed areas. This
  can actually increase average costs
  resulting in diseconomies of scale.
2.External Economies:
      It is a condition which brings about a
  decrease in LRAC of the firm because of
  changes happening outside the firm.
E.g. Taxation policies of Gov…

Más contenido relacionado

La actualidad más candente (20)

The law of equi marginal utility
The law of equi marginal utilityThe law of equi marginal utility
The law of equi marginal utility
 
Cost and revenue analysis
Cost and revenue analysisCost and revenue analysis
Cost and revenue analysis
 
CONCEPTS OF COST
CONCEPTS OF COSTCONCEPTS OF COST
CONCEPTS OF COST
 
Law of variable proportion
Law of variable proportionLaw of variable proportion
Law of variable proportion
 
Theory of cost
Theory of costTheory of cost
Theory of cost
 
Costs functions
Costs functionsCosts functions
Costs functions
 
Revenues and revenue curves
Revenues and revenue curvesRevenues and revenue curves
Revenues and revenue curves
 
Least cost combination
Least cost combinationLeast cost combination
Least cost combination
 
Marginal and average cost
Marginal and average costMarginal and average cost
Marginal and average cost
 
Price determination under perfect competition
Price determination under perfect competitionPrice determination under perfect competition
Price determination under perfect competition
 
Lecture 7
Lecture 7Lecture 7
Lecture 7
 
Law of variable proportion
Law of variable proportionLaw of variable proportion
Law of variable proportion
 
Breakeven and shutdown
Breakeven and shutdownBreakeven and shutdown
Breakeven and shutdown
 
Production economics
Production economicsProduction economics
Production economics
 
Types of elasticity of demand
Types of elasticity of demandTypes of elasticity of demand
Types of elasticity of demand
 
law of variable proportions
law of variable proportionslaw of variable proportions
law of variable proportions
 
Production function
Production functionProduction function
Production function
 
PRICING THE FACTORS OF PRODUCTION.
PRICING  THE  FACTORS  OF  PRODUCTION.PRICING  THE  FACTORS  OF  PRODUCTION.
PRICING THE FACTORS OF PRODUCTION.
 
Law of Returns
Law of ReturnsLaw of Returns
Law of Returns
 
Perfect Competitive Market
Perfect Competitive Market Perfect Competitive Market
Perfect Competitive Market
 

Destacado

Cost Accounting
Cost AccountingCost Accounting
Cost Accountingashu1983
 
Different types of costs PPT ON COST ACCOUNTANCY MBA
Different types of costs PPT ON COST ACCOUNTANCY MBADifferent types of costs PPT ON COST ACCOUNTANCY MBA
Different types of costs PPT ON COST ACCOUNTANCY MBABabasab Patil
 
methods, techniques and system of costing
methods, techniques and system of costingmethods, techniques and system of costing
methods, techniques and system of costingkunalaggarwal2007
 
Chapter 11 cost methods, techniques of cost accounting and classification o...
Chapter 11  cost  methods, techniques of cost accounting and classification o...Chapter 11  cost  methods, techniques of cost accounting and classification o...
Chapter 11 cost methods, techniques of cost accounting and classification o...Kanav Sood
 
2013-14 HIV and AIDS Public Expenditure Review: Tanzania Mainland
2013-14 HIV and AIDS Public Expenditure Review: Tanzania Mainland2013-14 HIV and AIDS Public Expenditure Review: Tanzania Mainland
2013-14 HIV and AIDS Public Expenditure Review: Tanzania MainlandHFG Project
 
LIMIT STATE DESIGN OF RCC
LIMIT STATE DESIGN OF RCCLIMIT STATE DESIGN OF RCC
LIMIT STATE DESIGN OF RCCPavan Kumar
 
Pricing Decisions
Pricing DecisionsPricing Decisions
Pricing Decisionsravalhimani
 
Techno-Economic Appraisal
Techno-Economic AppraisalTechno-Economic Appraisal
Techno-Economic AppraisalVedant Makwana
 
Pricing decisions
Pricing decisionsPricing decisions
Pricing decisionsalka1522
 
cross polar microscopy on crude
cross polar microscopy on crudecross polar microscopy on crude
cross polar microscopy on crudeAkshaya Mishra
 

Destacado (20)

Cost Accounting
Cost AccountingCost Accounting
Cost Accounting
 
Managerial Economics Cost PPT
Managerial Economics Cost PPTManagerial Economics Cost PPT
Managerial Economics Cost PPT
 
Different types of costs PPT ON COST ACCOUNTANCY MBA
Different types of costs PPT ON COST ACCOUNTANCY MBADifferent types of costs PPT ON COST ACCOUNTANCY MBA
Different types of costs PPT ON COST ACCOUNTANCY MBA
 
Production Function
Production FunctionProduction Function
Production Function
 
Cost accounting ppt
Cost accounting pptCost accounting ppt
Cost accounting ppt
 
methods, techniques and system of costing
methods, techniques and system of costingmethods, techniques and system of costing
methods, techniques and system of costing
 
Chapter 11 cost methods, techniques of cost accounting and classification o...
Chapter 11  cost  methods, techniques of cost accounting and classification o...Chapter 11  cost  methods, techniques of cost accounting and classification o...
Chapter 11 cost methods, techniques of cost accounting and classification o...
 
Microeconomics: Cost Functions
Microeconomics: Cost FunctionsMicroeconomics: Cost Functions
Microeconomics: Cost Functions
 
Theory of Production
Theory of ProductionTheory of Production
Theory of Production
 
2013-14 HIV and AIDS Public Expenditure Review: Tanzania Mainland
2013-14 HIV and AIDS Public Expenditure Review: Tanzania Mainland2013-14 HIV and AIDS Public Expenditure Review: Tanzania Mainland
2013-14 HIV and AIDS Public Expenditure Review: Tanzania Mainland
 
Cost accounting
Cost accountingCost accounting
Cost accounting
 
Eem ppt
Eem pptEem ppt
Eem ppt
 
LIMIT STATE DESIGN OF RCC
LIMIT STATE DESIGN OF RCCLIMIT STATE DESIGN OF RCC
LIMIT STATE DESIGN OF RCC
 
Cost function
Cost functionCost function
Cost function
 
Cost Analysis
Cost AnalysisCost Analysis
Cost Analysis
 
Pricing Decisions
Pricing DecisionsPricing Decisions
Pricing Decisions
 
Pricing in Economics
Pricing in Economics Pricing in Economics
Pricing in Economics
 
Techno-Economic Appraisal
Techno-Economic AppraisalTechno-Economic Appraisal
Techno-Economic Appraisal
 
Pricing decisions
Pricing decisionsPricing decisions
Pricing decisions
 
cross polar microscopy on crude
cross polar microscopy on crudecross polar microscopy on crude
cross polar microscopy on crude
 

Similar a Cost Concepts (20)

Cost CONCEPT
Cost CONCEPTCost CONCEPT
Cost CONCEPT
 
COST
COSTCOST
COST
 
cost3-161126065821 (1).pptx
cost3-161126065821 (1).pptxcost3-161126065821 (1).pptx
cost3-161126065821 (1).pptx
 
Ch07
Ch07 Ch07
Ch07
 
Short-Run Costs and Output Decisions
Short-Run Costs and Output DecisionsShort-Run Costs and Output Decisions
Short-Run Costs and Output Decisions
 
Ch07
Ch07Ch07
Ch07
 
Cost curve
Cost curveCost curve
Cost curve
 
Cost
CostCost
Cost
 
9 costs class
9 costs class9 costs class
9 costs class
 
Theory of cost final
Theory of cost finalTheory of cost final
Theory of cost final
 
Case Econ08 Ppt 08
Case Econ08 Ppt 08Case Econ08 Ppt 08
Case Econ08 Ppt 08
 
Me 6
Me 6Me 6
Me 6
 
theory of cost
theory of costtheory of cost
theory of cost
 
Cost theory
Cost theoryCost theory
Cost theory
 
Cost 2
Cost 2Cost 2
Cost 2
 
Cost Revenue and Market Equilibrium
Cost Revenue and Market EquilibriumCost Revenue and Market Equilibrium
Cost Revenue and Market Equilibrium
 
Cost
CostCost
Cost
 
Cost analysis
Cost analysisCost analysis
Cost analysis
 
Cost output relationship
Cost output relationshipCost output relationship
Cost output relationship
 
Cost function.ppt
Cost function.pptCost function.ppt
Cost function.ppt
 

Más de AIT

Ict role in agriculture
Ict role in agricultureIct role in agriculture
Ict role in agricultureAIT
 
Role of financial institutions for funding enterprise
Role of financial institutions  for funding enterpriseRole of financial institutions  for funding enterprise
Role of financial institutions for funding enterpriseAIT
 
Gps vehicular navigation
Gps vehicular navigationGps vehicular navigation
Gps vehicular navigationAIT
 
D:\Semester\5th Sem\Ppt\Alternative Fuels
D:\Semester\5th Sem\Ppt\Alternative FuelsD:\Semester\5th Sem\Ppt\Alternative Fuels
D:\Semester\5th Sem\Ppt\Alternative FuelsAIT
 
Modify Tools
Modify ToolsModify Tools
Modify ToolsAIT
 
Tea
TeaTea
TeaAIT
 
Blood Donor
Blood DonorBlood Donor
Blood DonorAIT
 
Applications Of Industrial Biotechnology
Applications Of Industrial BiotechnologyApplications Of Industrial Biotechnology
Applications Of Industrial BiotechnologyAIT
 
Artificial Intelligence
Artificial IntelligenceArtificial Intelligence
Artificial IntelligenceAIT
 
Monetary Policy
Monetary PolicyMonetary Policy
Monetary PolicyAIT
 
e commerce
e commercee commerce
e commerceAIT
 
Hybrid Rice
Hybrid RiceHybrid Rice
Hybrid RiceAIT
 
attitude
attitudeattitude
attitudeAIT
 
computer
computercomputer
computerAIT
 
Tft Monitor
Tft MonitorTft Monitor
Tft MonitorAIT
 
Central dogma
Central dogmaCentral dogma
Central dogmaAIT
 
Temperature Transducer
Temperature TransducerTemperature Transducer
Temperature TransducerAIT
 

Más de AIT (17)

Ict role in agriculture
Ict role in agricultureIct role in agriculture
Ict role in agriculture
 
Role of financial institutions for funding enterprise
Role of financial institutions  for funding enterpriseRole of financial institutions  for funding enterprise
Role of financial institutions for funding enterprise
 
Gps vehicular navigation
Gps vehicular navigationGps vehicular navigation
Gps vehicular navigation
 
D:\Semester\5th Sem\Ppt\Alternative Fuels
D:\Semester\5th Sem\Ppt\Alternative FuelsD:\Semester\5th Sem\Ppt\Alternative Fuels
D:\Semester\5th Sem\Ppt\Alternative Fuels
 
Modify Tools
Modify ToolsModify Tools
Modify Tools
 
Tea
TeaTea
Tea
 
Blood Donor
Blood DonorBlood Donor
Blood Donor
 
Applications Of Industrial Biotechnology
Applications Of Industrial BiotechnologyApplications Of Industrial Biotechnology
Applications Of Industrial Biotechnology
 
Artificial Intelligence
Artificial IntelligenceArtificial Intelligence
Artificial Intelligence
 
Monetary Policy
Monetary PolicyMonetary Policy
Monetary Policy
 
e commerce
e commercee commerce
e commerce
 
Hybrid Rice
Hybrid RiceHybrid Rice
Hybrid Rice
 
attitude
attitudeattitude
attitude
 
computer
computercomputer
computer
 
Tft Monitor
Tft MonitorTft Monitor
Tft Monitor
 
Central dogma
Central dogmaCentral dogma
Central dogma
 
Temperature Transducer
Temperature TransducerTemperature Transducer
Temperature Transducer
 

Último

The Stolen Bacillus by Herbert George Wells
The Stolen Bacillus by Herbert George WellsThe Stolen Bacillus by Herbert George Wells
The Stolen Bacillus by Herbert George WellsEugene Lysak
 
CapTechU Doctoral Presentation -March 2024 slides.pptx
CapTechU Doctoral Presentation -March 2024 slides.pptxCapTechU Doctoral Presentation -March 2024 slides.pptx
CapTechU Doctoral Presentation -March 2024 slides.pptxCapitolTechU
 
5 charts on South Africa as a source country for international student recrui...
5 charts on South Africa as a source country for international student recrui...5 charts on South Africa as a source country for international student recrui...
5 charts on South Africa as a source country for international student recrui...CaraSkikne1
 
Quality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICEQuality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICESayali Powar
 
Diploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfDiploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfMohonDas
 
10 Topics For MBA Project Report [HR].pdf
10 Topics For MBA Project Report [HR].pdf10 Topics For MBA Project Report [HR].pdf
10 Topics For MBA Project Report [HR].pdfJayanti Pande
 
How to Add a New Field in Existing Kanban View in Odoo 17
How to Add a New Field in Existing Kanban View in Odoo 17How to Add a New Field in Existing Kanban View in Odoo 17
How to Add a New Field in Existing Kanban View in Odoo 17Celine George
 
Vani Magazine - Quarterly Magazine of Seshadripuram Educational Trust
Vani Magazine - Quarterly Magazine of Seshadripuram Educational TrustVani Magazine - Quarterly Magazine of Seshadripuram Educational Trust
Vani Magazine - Quarterly Magazine of Seshadripuram Educational TrustSavipriya Raghavendra
 
EBUS5423 Data Analytics and Reporting Bl
EBUS5423 Data Analytics and Reporting BlEBUS5423 Data Analytics and Reporting Bl
EBUS5423 Data Analytics and Reporting BlDr. Bruce A. Johnson
 
In - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxIn - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxAditiChauhan701637
 
Work Experience for psp3 portfolio sasha
Work Experience for psp3 portfolio sashaWork Experience for psp3 portfolio sasha
Work Experience for psp3 portfolio sashasashalaycock03
 
How to Show Error_Warning Messages in Odoo 17
How to Show Error_Warning Messages in Odoo 17How to Show Error_Warning Messages in Odoo 17
How to Show Error_Warning Messages in Odoo 17Celine George
 
Patient Counselling. Definition of patient counseling; steps involved in pati...
Patient Counselling. Definition of patient counseling; steps involved in pati...Patient Counselling. Definition of patient counseling; steps involved in pati...
Patient Counselling. Definition of patient counseling; steps involved in pati...raviapr7
 
Easter in the USA presentation by Chloe.
Easter in the USA presentation by Chloe.Easter in the USA presentation by Chloe.
Easter in the USA presentation by Chloe.EnglishCEIPdeSigeiro
 
Optical Fibre and It's Applications.pptx
Optical Fibre and It's Applications.pptxOptical Fibre and It's Applications.pptx
Optical Fibre and It's Applications.pptxPurva Nikam
 
How to Make a Field read-only in Odoo 17
How to Make a Field read-only in Odoo 17How to Make a Field read-only in Odoo 17
How to Make a Field read-only in Odoo 17Celine George
 
Department of Health Compounder Question ‍Solution 2022.pdf
Department of Health Compounder Question ‍Solution 2022.pdfDepartment of Health Compounder Question ‍Solution 2022.pdf
Department of Health Compounder Question ‍Solution 2022.pdfMohonDas
 

Último (20)

The Stolen Bacillus by Herbert George Wells
The Stolen Bacillus by Herbert George WellsThe Stolen Bacillus by Herbert George Wells
The Stolen Bacillus by Herbert George Wells
 
CapTechU Doctoral Presentation -March 2024 slides.pptx
CapTechU Doctoral Presentation -March 2024 slides.pptxCapTechU Doctoral Presentation -March 2024 slides.pptx
CapTechU Doctoral Presentation -March 2024 slides.pptx
 
Prelims of Kant get Marx 2.0: a general politics quiz
Prelims of Kant get Marx 2.0: a general politics quizPrelims of Kant get Marx 2.0: a general politics quiz
Prelims of Kant get Marx 2.0: a general politics quiz
 
5 charts on South Africa as a source country for international student recrui...
5 charts on South Africa as a source country for international student recrui...5 charts on South Africa as a source country for international student recrui...
5 charts on South Africa as a source country for international student recrui...
 
Quality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICEQuality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICE
 
March 2024 Directors Meeting, Division of Student Affairs and Academic Support
March 2024 Directors Meeting, Division of Student Affairs and Academic SupportMarch 2024 Directors Meeting, Division of Student Affairs and Academic Support
March 2024 Directors Meeting, Division of Student Affairs and Academic Support
 
Diploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfDiploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdf
 
10 Topics For MBA Project Report [HR].pdf
10 Topics For MBA Project Report [HR].pdf10 Topics For MBA Project Report [HR].pdf
10 Topics For MBA Project Report [HR].pdf
 
How to Add a New Field in Existing Kanban View in Odoo 17
How to Add a New Field in Existing Kanban View in Odoo 17How to Add a New Field in Existing Kanban View in Odoo 17
How to Add a New Field in Existing Kanban View in Odoo 17
 
Vani Magazine - Quarterly Magazine of Seshadripuram Educational Trust
Vani Magazine - Quarterly Magazine of Seshadripuram Educational TrustVani Magazine - Quarterly Magazine of Seshadripuram Educational Trust
Vani Magazine - Quarterly Magazine of Seshadripuram Educational Trust
 
EBUS5423 Data Analytics and Reporting Bl
EBUS5423 Data Analytics and Reporting BlEBUS5423 Data Analytics and Reporting Bl
EBUS5423 Data Analytics and Reporting Bl
 
In - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxIn - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptx
 
Work Experience for psp3 portfolio sasha
Work Experience for psp3 portfolio sashaWork Experience for psp3 portfolio sasha
Work Experience for psp3 portfolio sasha
 
Finals of Kant get Marx 2.0 : a general politics quiz
Finals of Kant get Marx 2.0 : a general politics quizFinals of Kant get Marx 2.0 : a general politics quiz
Finals of Kant get Marx 2.0 : a general politics quiz
 
How to Show Error_Warning Messages in Odoo 17
How to Show Error_Warning Messages in Odoo 17How to Show Error_Warning Messages in Odoo 17
How to Show Error_Warning Messages in Odoo 17
 
Patient Counselling. Definition of patient counseling; steps involved in pati...
Patient Counselling. Definition of patient counseling; steps involved in pati...Patient Counselling. Definition of patient counseling; steps involved in pati...
Patient Counselling. Definition of patient counseling; steps involved in pati...
 
Easter in the USA presentation by Chloe.
Easter in the USA presentation by Chloe.Easter in the USA presentation by Chloe.
Easter in the USA presentation by Chloe.
 
Optical Fibre and It's Applications.pptx
Optical Fibre and It's Applications.pptxOptical Fibre and It's Applications.pptx
Optical Fibre and It's Applications.pptx
 
How to Make a Field read-only in Odoo 17
How to Make a Field read-only in Odoo 17How to Make a Field read-only in Odoo 17
How to Make a Field read-only in Odoo 17
 
Department of Health Compounder Question ‍Solution 2022.pdf
Department of Health Compounder Question ‍Solution 2022.pdfDepartment of Health Compounder Question ‍Solution 2022.pdf
Department of Health Compounder Question ‍Solution 2022.pdf
 

Cost Concepts

  • 2. Cost Concept:  It is used for analyzing the cost of a project in short and long run.
  • 3. Types of Cost:  Total fixed costs (TFC)  Average fixed costs (AFC)  Total variable costs (TVC)  Average variable cost (AVC)  Total cost (TC)  Average total cost (ATC)  Marginal cost (MC)
  • 4. Fixed Costs(FC) Fixed Cost denotes the costs which do not vary with the level of production. FC is independent of output. Eg: Depreciation, Interest Rate, Rent, Taxes  Total fixed cost (TFC): All costs associated with the fixed input.  Average fixed cost per unit of output: AFC = TFC /Output
  • 5. Variable Costs(VC) Variable Costs is the rest of total cost, the part that varies as you produce more or less. It depends on Output. Eg: Increase of output with labour.  Total variable cost (TVC): All costs associated with the variable input.  Average variable cost- cost per unit of output: AVC = TVC/ Output
  • 6. Total costs(TC) The sum of total fixed costs and total variable costs: TC = TFC + TVC Average Total Cost Average total cost per unit of output: ATC =AFC + AVC ATC = TC/ Output
  • 7. Marginal Costs  The additional cost incurred from producing an additional unit of output: MC = ∆ TC ∆ Output MC = ∆ TVC ∆ Output
  • 8. Typical Total Cost Curves  TVC,TC is always increasing:  First at a decreasing rate.  Then at an increasing rate
  • 9. Typical Average & Marginal Cost Curves
  • 10. AFC is always  MC is generally declining at a increasing. decreasing rate.  MC crosses ATC and  ATC and AVC decline AVC at their minimum at first, reach a point. minimum, then  If MC is below the average increase at higher value: levels of output.  Average value will be  The difference decreasing. between ATC and AVC  If MC is above the average value: is equal to AFC.  Average value will be increasing.
  • 11. Production Rules for the Short-Run 1.If expected selling price < minimum AVC (which implies TR < TVC):  A loss cannot be avoided.  Minimize loss by not producing.  The loss will be equal to TFC. 2.If expected selling price < minimum ATC but > minimum AVC: (which implies TR > TVC but < TC)  A loss cannot be avoided.  Minimize loss by producing where MR = MC.  The loss will be between 0 and TFC.
  • 12. Contd… 3.If expected selling price > minimum ATC (which implies TR > TC):  A profit can be made.  Maximize profit by producing where: MR = MC
  • 13. Short Run Production Decisions SP SP
  • 14. Long Run Costs Curve:  All costs are variable in the long run.  There is only AVC in LR, since all factors are variable.  It is also called as Planning Curve or Envelope or scale curve.
  • 15. Production Rules for the Long-Run 1.If selling price > ATC (or TR > TC):  Continue to produce.  Maximize profit by producing where MR = MC. 2.If selling price < ATC (or TR < TC):  There will be a continual loss.  Sell the fixed assets to eliminate fixed costs.  Reinvest money is a more profitable alternative.
  • 16. Long Run Cost Curve Economies of scale Diseconomies of scale M M-optimum level of production
  • 17. Economies of Scale:  Economies of scale are the cost advantages that a firm obtains due to expansion. Diseconomies is the opposite.  Two types: 1. Pecuniary Economies of Scale: Paying low prices because of buying in large Quantity.
  • 18. 2.Real Economies of Scale: Refers to reduction in physical quantities of input , per unit of output when the size of the firm increases, as a result input cost minimized.
  • 19. Diseconomies: 1.Internal Economies: It is a condition which brings about a decrease in LRAC of the firm because of changes happening within the firm. e.g.As a company's scope increases, it may have to distribute its goods and services in progressively more dispersed areas. This can actually increase average costs resulting in diseconomies of scale.
  • 20. 2.External Economies: It is a condition which brings about a decrease in LRAC of the firm because of changes happening outside the firm. E.g. Taxation policies of Gov…