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    Cost

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    sneh2k10
    Cost is the total amount spent on inputs used in production. A firm's cost function shows the relationship between its costs and output levels. Traditional economists believe average and marginal cost curves are U-shaped, while modern economists believe they are L-shaped. In the short run, total cost is the sum of total fixed cost and total variable cost. Average and marginal costs are also defined. In the long run, all inputs are variable, allowing firms to minimize costs. Long run cost curves show minimum possible costs at different output levels.

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    Cost

    Uploaded by

    sneh2k10
    503 views23 pages
    Cost is the total amount spent on inputs used in production. A firm's cost function shows the relationship between its costs and output levels. Traditional economists believe average and marginal cost curves are U-shaped, while modern economists believe they are L-shaped. In the short run, total cost is the sum of total fixed cost and total variable cost. Average and marginal costs are also defined. In the long run, all inputs are variable, allowing firms to minimize costs. Long run cost curves show minimum possible costs at different output levels.

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    Cost is the total amount spent on inputs used in production. A firm's cost function shows the relationship between its costs and output levels. Traditional economists believe average and marginal cost curves are U-shaped, while modern economists believe they are L-shaped. In the short run, total cost is the sum of total fixed cost and total variable cost. Average and marginal costs are also defined. In the long run, all inputs are variable, allowing firms to minimize costs. Long run cost curves show minimum possible costs at different output levels.

    Copyright:

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

    Cost

    Uploaded by

    sneh2k10
    Cost is the total amount spent on inputs used in production. A firm's cost function shows the relationship between its costs and output levels. Traditional economists believe average and marginal cost curves are U-shaped, while modern economists believe they are L-shaped. In the short run, total cost is the sum of total fixed cost and total variable cost. Average and marginal costs are also defined. In the long run, all inputs are variable, allowing firms to minimize costs. Long run cost curves show minimum possible costs at different output levels.

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    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 23

    Cost: A Definition

    In order to produce a good, every firm makes


    use of various factor and non-factor inputs. In
    common parlance the amount spent on these
    inputs is called cost of production.
    Cost function: A firm’s cost function is the
    functional relationship between its cost and its
    output.
    Theories of Cost

    Traditional Modern
    Theory Theory
    Traditional Theory VS Modern Theory
    Main Difference between traditional and
    modern theories of cost is that the traditional
    economists believe that average and marginal
    cost curves are ‘U’ shaped while the modern
    economists believe them to be of ‘L’ shaped.
    Traditional Approach

    Short Run Long Run


    Cost Curves Cost Curves
    Short Run Cost

    Total Cost Average Cost Marginal


    Cost
    Total Fixed Average
    Cost Fixed Cost

    Average
    Total Variable Cost
    Variable Cost
    Total Cost (TC)
    Total cost is the sum of all those expenses that
    the producer incurs in order to produce a given
    quantity of a commodity.
    In the words of Browing, “ Total cost identifies
    the costs of all the inputs, fixed and variable,
    used to produce a certain output.
    TC= TFC + TVC
    TFC= Total Fixed Cost
    TVC= Total Variable Cost
    Total Fixed Cost (TFC)
    In short period, the costs of fixed inputs are
    called total fixed costs. The fixed cost is equal to
    the unit of fixed factors multiplied by its price.
    TFC remains constant at all the levels of output
    ranging from 0 to infinity.
    Cost

    TFC

    0 Output
    Total Variable Cost (TVC)
    Variable costs are those costs which are incurred
    on the use of variable factors of production.
    These costs vary with the change in output level.
    In the words of Ferguson’ “Total variable cost is
    the sum of amounts spent for each of the
    variable input.”
    TVC
    Cost

    0 Output
    As described earlier TC is the sum of TFC and
    TVC…
    TC = TFC + TVC TC
    TVC
    Cost

    TFC

    0 Output
    Average Cost (AC)
    Average cost is the cost per unit of output. It is
    also called unit cost of production. It is obtained
    by dividing the TC by the level of output.
    TC
    AC 
    Q
    where Q is the level of output.

    AC = AFC + AVC
    AFC= average fixed cost
    AVC = average variable cost
    Average Fixed Cost (AFC)
    Average fixed cost is per unit fixed cost. It is total
    fixed cost divided by output.
    TFC
    AFC 
    Q
    AFC curves continuously declines but never
    touches X axis. Cost
    AFC

    0 Output
    Average Variable Cost (AVC)
    Average variable cost is per unit variable cost. It
    is total variable cost divided by output.
    TVC
    AVC 
    Q Cost AVC

    0 Output
    As described earlier … AC = AFC + AVC

    Cost
    AC

    0 Output
    Marginal Cost (MC)
    Marginal cost is the increase in total cost when
    output is increased by on unit. It is cost of
    producing one extra unit.
    TC Cost
    MC  MC
    Q
     TCn  TCn 1

    0
    Output
    MC

    Cost AC

    AVC

    AFC

    0
    Output
    Output TC TFC TVC AFC AVC AC MC

    0 10 10 0 -- 0 -- --

    1 20 10 10 10 10 20 10

    2 28 10 18 5 9 14 8

    3 34 10 24 3.3 8 11.3 6

    4 38 10 28 2.5 7 9.5 4

    5 42 10 32 2.0 6.4 8.4 4

    6 48 10 38 1.7 6.3 8 6

    7 56 10 46 1.4 6.6 8 8

    8 72 10 62 1.2 7.8 9 16
    Long Run Cost
    The long run is the period of time in which all
    inputs are variable. The firm has sufficient time to
    adjust its use of all inputs to produce output in the
    least costly way. In other way the firm can plan to
    produce at the minimum cost. The long run refers
    to the fact that producers can plan ahead and
    choose from among different methods of
    production of the short run to produce in future.
    Thus in a sense, the long run consists of all
    possible short run situations among which a
    Producer may choose. In other words, the
    producer operates in the short run and plans in
    the long run.

    Long Run Cost Curves

    Total Cost Average Cost Marginal Cost


    Long Run Total Cost (LRTC)
    The long run total cost of production is the least
    possible cost of producing any given level of output
    when all inputs are variable.
    LRTC is always less than or equal to short run total
    cost, but it can never be more than short run total
    cost.

    LTC  STC
    Long Run Average Cost (LAC)
    Long run average cost refers to minimum
    possible per unit cost of producing different
    quantities of output in the long run.
    In the words of Mansfield, “The long run average
    cost curve is that curve which shows the
    minimum cost per unit of producing each output
    level, corresponding to different scales of
    productivity.
    Long Run Marginal Cost (LMC)
    Change in the total cost, in the long run, due to
    production of one-more or one less unit of a
    commodity, is called long run marginal cost.
    cost

    LMC

    0
    Output

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