economics

1. Theory of Costs
(Short Term)

2. VARIABLE
COST
FIXED
COST
COST
• Cost is the sum of money incurred by the firm
to produce goods and services.
TC = TFC + TVC
COST

3. 0
50
100
150
200
250
0 1 2 3 4 5
FC
VC
TC
Production ( in Units)
Cost(inRupees)
TYPES OF COST

4. Average Fixed Cost (AFC) = TFC/Q
Where TFC = Total Fixed Cost and
Q = Total number of units produced
As Volume of units Increases, the unit fixed
decreases, forming a curve in shape of a
rectangular hyperbola.
AVERAGE FIXED COST

5. Costs
O Q
AFC
AVERAGE FIXED COST

6. AVERAGE VARIABLE COST
Average Variable Cost (AVC) is the Total Variable
Cost(TVC) of a firm divided by the total units of
output.
Costs
O Q
AVC
AVC = TVC/Q

7. AVERAGE COST
Average Cost (AC) is the Total Cost(TC) of a firm
divided by the total units of output(Q).
Costs
O Q
AC
AC = TC/Q

8. MARGINAL COST
The additional cost incurred to produce one
additional unit of output is called the marginal
cost.
MC = C/ Q
The marginal cost curve is U-shaped. Marginal cost
is relatively high at small quantities of output-
Then as production increases, it declines- then
reaches a minimum value- then rises.

9. COSTS(C)
OUTPUT(Q)
MC
MARGINAL COST CURVE

10. NUMERICAL EXAMPLE
Q TFC TVC TC AFC AVC AC MC
0 100 0 100 - - - -
1 100 20 120 100 20 120 20
2 100 37 137 50 18.5 68.5 17
3 100 52 152 33.33 17.33 50.67 15
4 100 80 180 25 20 45 28
5 100 120 220 20 24 44 40
6 100 165 265 16.67 27.5 44.17 45

11. Costs
O Q
AC
AVC
AFC
MC
x
y
z
Graphical Example

12. THANK YOU
Prasanth Narisetty PGDM2/1520