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Costconcepts 090715160417 Phpapp01

This document discusses various cost concepts used in analyzing costs of projects. It defines total fixed costs, average fixed costs, total variable costs, average variable costs, total costs and average total costs. It also defines marginal cost. Fixed costs do not vary with output while variable costs depend on output. The document discusses typical total cost, average cost and marginal cost curves. It provides production rules for firms in the short run and long run, including when to produce to maximize profits or minimize losses. Economies and diseconomies of scale are also summarized.

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Subhankar Patra
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38 views20 pages

Costconcepts 090715160417 Phpapp01

This document discusses various cost concepts used in analyzing costs of projects. It defines total fixed costs, average fixed costs, total variable costs, average variable costs, total costs and average total costs. It also defines marginal cost. Fixed costs do not vary with output while variable costs depend on output. The document discusses typical total cost, average cost and marginal cost curves. It provides production rules for firms in the short run and long run, including when to produce to maximize profits or minimize losses. Economies and diseconomies of scale are also summarized.

Uploaded by

Subhankar Patra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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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…

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