The document discusses factors that affect costs of production, including explicit costs for hired factors and implicit costs for owned factors used internally. It explains concepts like total, fixed, variable, average, and marginal costs, and how they are related and depicted graphically. It also covers the differences between short-run and long-run costs, how costs change with scale, and applications like break-even analysis.
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The document discusses factors that affect costs of production, including explicit costs for hired factors and implicit costs for owned factors used internally. It explains concepts like total, fixed, variable, average, and marginal costs, and how they are related and depicted graphically. It also covers the differences between short-run and long-run costs, how costs change with scale, and applications like break-even analysis.
The document discusses factors that affect costs of production, including explicit costs for hired factors and implicit costs for owned factors used internally. It explains concepts like total, fixed, variable, average, and marginal costs, and how they are related and depicted graphically. It also covers the differences between short-run and long-run costs, how costs change with scale, and applications like break-even analysis.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
The document discusses factors that affect costs of production, including explicit costs for hired factors and implicit costs for owned factors used internally. It explains concepts like total, fixed, variable, average, and marginal costs, and how they are related and depicted graphically. It also covers the differences between short-run and long-run costs, how costs change with scale, and applications like break-even analysis.
Copyright:
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Download as PPT, PDF, TXT or read online from Scribd
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Costs
Costs of of Production Production What factors affect costs What do we need to consider in costs Wherever production takes place, costs follow. One has to make payments for all factors of production, i.e. incur certain costs
Cost curves show the minimum cost of
producing various levels of output Explicit vs Implicit cost • Explicit costs are actual, out of pocket expenditures for factors hired or purchased e.g. rent. • Implicit costs are costs of factors owned by firm and used in its own production process. COSTS= EXPLICIT + IMPLICIT
SUNK COSTS Time period and costs Short Run costs • Total fixed cost (TFC)– cost which firm incurs for fixed inputs, whether there is output or not. eg. Rent • Total variable cost (TVC) –cost incurred by firm for variable input eg raw material TOTAL COST = TFC + TVC
Long run costs All costs are variable
Numerical Q TFC TVC TC • Plot in the form of 0 60 0 a graph. 1 60 30 2 60 40 • What is the shape 3 60 45 of cost curve 4 60 55 5 60 75 • New image 1 6 60 120 FIGURE 6-7 Short-Run Total Cost, Total Variable Cost, and Total Fixed Cost Short run units costs Average fixed costs (AFC)=TFC/output Average variable costs (AVC)=TVC/output Average cost =Total cost/output AC = AVC +AFC Marginal cost (MC)= change in TC per unit of output (Calculate and Plot all costs on a graph……) Fill in blanks Q TC TFC TVC ATC AFC AVC MC 0 125 10 5 20 10.5 30 110 40 255 50 3 60 3 70 5 Short run unit costs Shape of MC,AVC and AC curve • Why are MC, AVC and AC curve U shaped? • Why does AC reach its lowest point to right of point at which AVC curve is lowest? • Why does the MC curve intersect the AVC and AC curves at their respective lowest point? Long Run costs • In long run, all factors are variable. The firm can build a plant of any size. • The long run average cost (LAC) curve shows the minimum per unit cost of producing each level of output when any desired scale of plant can be built. LAC is given by a curve tangent to all SAC curves representing all alternative plant sizes that the firm can build in the long run. • Mathematically, LAC is envelope of SAC curves. Relationship Between Short-Run Average Cost Curves and the Long-Run Average Cost Curve Economies of Scale • Why does LAC fall in beginning - Economies of scale (Internal vz external economy)
- Why does LAC rise eventually
- Diseconomies of scale (internal vz external) Long-Run Average Cost and Returns to Scale Learning curves • As firm gain experience in production of a commodity, the average cost of production declines. For a given level of output, cost per unit decreases. the learning curve shows decline in average input cost of production with rising cumulative total output over time. Estimating and using cost functions • Find minimum total cost function given TC = 1000 + 10 Q _ .9Q² + .04Q³
Find rate of output that results in
minimum average variable cost Profit = Revenue - Cost Revenue concepts = TR, MR, AR
Total Revenue (TR): The sum total of sale proceeds
from no. of units sold. TR= P.Q Average Revenue: This is TR/ quantity
Marginal Revenue: This is change in total revenue when
there is change in quantity sold of a product. MRn = TRn – TRn-1. International applications of cost minimisation • Growing importance of international trade i.e. theory of comparative advantage • MNC which have production plants throughout the world International applications contd… • Ability on part of some firms to satisfy their needs for some skilled labour from abroad
• Brain drain • Outsourcing trends – bpo, kpo, lpo Break even analysis • The break even point is that point of activity (sales volume) where total revenue and total expenses are equal. It is point of zero profit. 1. Breakeven point in units 2. Breakeven point in sales 3. Breakeven point in percentage Break-Even Analysis • At the Break-even point TR = TC, but TR TVC TFC or P(Q) AVC (Q) TFC TFC therefore: QBEP P AVC (P - AVC) is known as the unit contribution margin. [1-(AVC/P)] is known as the
contribution margin ratio and indicates
the fraction of the price that covers fixed cost and profit Break even analysis • S b = TFC 1- ( TVC/ TR)
