COSTS

COSTS (TYPES)

Nominal cost is the money cost of production or called expenses of production. Real cost is the opportunity cost of production.

COSTS (TYPES)
Accounting Costs includes Explicit Costs

Wages to labor Interest on borrowed capital Rent or royalty to owners. Cost of raw materials Replacement and repairing charges of machinery Depreciation of capital goods Normal profits of the producer.

COSTS (TYPES)

Economic costs = Explicit cost + Implicit cost Explicit cost - is the payment which the firm makes to those outsiders who supply labor services, raw materials, transport services, electricity etc. Implicit cost -are the cost of self owned resources which are employed by the firm. They are non expenditure or implicit costs.

COSTS (TYPES)

Opportunity cost = the value of the cost of production of a particular product as the value of the next best foregone alternative products that resources used in its production could have produced.

COSTS (TYPES)

Fixed costs - cost which remains fixed irrespective of the level of output produced. They remain constant in the short run can change only in the long run.
Variable cost - vary with the level of output in the short run as well as in the long run. Total cost (TC) = Fixed cost (FC) + Variable Cost (VC)

COSTS (TYPES)

Incremental cost - cost which increase because of expansion of a firm. Sunk cost - which have to be borne whether there is expansion or not.

COSTS (TYPES)

Avoidable cost which can be avoided due to contraction of the firm. Unavoidable cost cannot be avoided because of the contraction. Common cost are common to all the products of multiple product firm. Traceable cost costs which are traceable to a particular product of a multiple product firm.

COSTS (TYPES)

Historical Cost Replacement Cost Short Run cost some costs are fixed. Long Run Cost all costs are variable.

COSTS (TYPES)
Short Run and Long Run Cost Curves of a Firm

TC = TFC + TVC AC = AFC + AVC Average Fixed Cost : AFC = TFC / units of output Average Variable Cost : AVC = TVC / units of output Average Cost : AC = TC / units of output

COSTS (TYPES)

Marginal Cost : MC = Rate of change in the total cost or total variable cost due to one additional unit TC MC= Output

Economies of Scale
Large-scale production results in some advantages.
When X% of Inputs give more than X% of Output

Economies of Scale
Internal Economies (Individual Firm) Technical Economies Commercial Economies Managerial Economies Financial Economies Risk and Uncertainty Economies External Economies (Concentration of Firms) Infrastructure development Ancillary Firms Research institutes

Diseconomies of Scale.
As a firm expands beyond a limit, it becomes unwieldy. When X% of inputs give less than X% of output

Diseconomies of Scale.
Internal Diseconomies External Diseconomies Technical Problems Increase in factor prices Managerial Inefficiency Increase in raw Neglect of customers material prices Labor problems Congestion and pollution

Break Even Analysis or Cost-volume-profit Analysis

The traditional concept of equilibrium of a firm

Break-Even : Total = Point Revenue

Total Cost

i.e No- Profit No- loss Point