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CF 303 Lecture.7

The lecture discusses key concepts in applied economics for engineers, focusing on the cost of production, including explicit and implicit costs, fixed and variable costs, and the relationship between total cost and output. It emphasizes the importance of understanding different types of costs and their behavior in production. The document provides examples to illustrate these concepts, aiding in the comprehension of economic principles relevant to engineering.

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Arifah
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5 views12 pages

CF 303 Lecture.7

The lecture discusses key concepts in applied economics for engineers, focusing on the cost of production, including explicit and implicit costs, fixed and variable costs, and the relationship between total cost and output. It emphasizes the importance of understanding different types of costs and their behavior in production. The document provides examples to illustrate these concepts, aiding in the comprehension of economic principles relevant to engineering.

Uploaded by

Arifah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Applied Economics For Engineers

Lecture No.7

Presented By:
KAMRAN AKRAKM SHAIKH

Department of Civil Engineering

1
By :KAMRAN AKRAM SHAIKH
Quick Recap
• Market Equilibrium
• Effect on price & quantity when
Shortage/Excess Demand
• Effect on price & quantity when
Surplus/Excess Supply

By :KAMRAN AKRAM SHAIKH 2


Learning outcomes.
• Cost of production
• Types of cost
• Cost function
• Cost Behavior
• Relationship between MC & AC

By :KAMRAN AKRAM SHAIKH 3


Cost of Production
• It is a sum of all the expenses that producer has
to bears in order to attract different factors of
production into the business for producing goods
and services.
• Example:
• Wages & salaries of workers
• Interest on borrowed / Debt capital
• Rent of building
• Depreciation on capital goods(machines, plant,
equipment, buildings, automobile etc )

By :KAMRAN AKRAM SHAIKH 4


Implicit Cost Vs Explicit Cost
• The traditional cost approach focuses only on
monetary expense like wage ,rent, interest
and amount paid for raw material ,installation
of plant (explicit cost) etc., but the modern
economics approach for cost include imputed
value of goods and services (implicit cost)

Total Cost = Explicit Cost + Implicit Cost


By :KAMRAN AKRAM SHAIKH 5
Explicit Cost
• Explicit cost are paid out costs. It consist of all money
expenses which firm has to pay to outsiders who supply
different factors of production.
Examples:

• Wages and salaries of workers Raw material cost


• Transportation cost Fuel expense
• Utility expense Taxes & duties
• Advertising expense Insurance expense
• Interest on loans Rent of hired office building
• Payment of profit to share holders of company

By :KAMRAN AKRAM SHAIKH 6


Implicit Cost
• Implicit cost consist of firm’s self-owned of self-
employed resources. These are paid to the owner
of firm for providing his self employed resource.
Examples:
• Salary of owner working as Engineer
• Interest on capital provided by the owner
• Normal profit of entrepreneur
• Rent of building provided by the owner

By :KAMRAN AKRAM SHAIKH 7


Fixed Cost Vs Variable Cost
• In short run some cost are fixed and some are
variable.
• In long run all cost are variable.
• Fixed Cost (FC): cost that is constant over a
wide range of production. OR
It is independent of out put produced.
• Example: salaries of permanent employees
rent of building, Interest on Debt capital,
insurance premium, Plant cost etc
By :KAMRAN AKRAM SHAIKH 8
Variable Cost(VC)
• Costs that vary with respect to out put
produced are called variable cost.
• Example:
• Wages of daily worker
• Material cost
• Fuel / energy cost
• Maintenance cost
• Transportation cost

By :KAMRAN AKRAM SHAIKH 9


Total Cost
TC = FC + VC
• FC = FC FC
+
• VC = f(Q)
• VC = vQ Q (out put)

• TC = FC + VC VC
+

• TC = FC + vQ
• TC = 100 + 2Q TC
Q (out put)

(This is linear total cost function)


FC
By :KAMRAN AKRAM SHAIKH 10
Q (out put)
Behavior of Total Cost
• TC is increasing cost

function of out put

• TC is increasing with
decreasing rate.

• TC is increasing with
constant rate.
Out put(Q)

• TC is increasing with
increasing rate.
By :KAMRAN AKRAM SHAIKH 11
Direct Cost Vs Indirect Cost
• Direct Cost / Prime Cost : cost that can
reasonably allocate to specific unit of out put.
Example: Direct Labor cost, Direct Material cost
• Indirect Cost / Overhead Cost : it is difficult to
allocate specific unit of out put.
Example: Administrative cost, advertising &
marketing cost, utility expense, transportation

By :KAMRAN AKRAM SHAIKH 12

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