ECONOMICS GROUP
PRESENTATION
COST , TYPES OF COST AND
BEHAVIOUR OF COST CURVES
COST
• Cost , refers to the value of money that has been used up to produce and
sell a product.
• Each cost is recorded in a different expense account depending on its
purpose.
• Business decisions are generally based on cost of production i.e. the money
value of inputs and output is considered.
TYPES OF COST
• Accounting Costs and Economic Costs
• Outlay Costs and Opportunity Costs
• Direct or Traceable Costs and Indirect or Non- Traceable Costs
• Historical Costs and Replacement Costs
• Private Costs and Social Costs
• Fixed Costs and Variable Costs
• Total , Average and Marginal Costs
Accounting Costs and Economic Costs
• ACCOUNTING COSTS :-
Accounting Costs , also known as Explicit Cost refers to the money expenses
which the firm has to incur in purchasing or hiring the factor services.
• ECONOMIC COSTS :-
Economic Costs take into account the accounting costs, in addition, they also take
into account the amount of money the entrepreneur could have earned if he had
invested his money and sold his own services and other factors in the next best
Outlay Costs and Opportunity Costs
• OUTLAY COSTS :-
Outlay Costs involve actual expenditure of funds on , say , wages , materials ,
rent , interest , etc.
• OPPORTUNITY COSTS :-
Opportunity Cost , is concerned with the cost of the next best alternative
opportunity which was foregone in order to purse a certain action.
Example : The Opportunity Cost of using capital is the interest that it can earn
in the next best use with equal risk.
Direct or Traceable Costs and
Indirect or Non- Traceable Costs
• DIRECT OR TRACEABLE COSTS :-
Direct Costs or Traceable Costs are those which have direct relationship with
a component of operation like manufacturing a product , organizing a process
or an activity , etc.
• INDIRECT OR NON-TRACEABLE COSTS :-
Indirect or Non-Traceable Costs are those which are not easily and definitely
identifiable in relation to a plant, product , process or department.
Historical Costs and Replacement Costs
• HISTORICAL COSTS :-
Historical Cost refers to the cost incurred in the past on the acquisition of a
productive asset such as machinery , building, etc.
• REPLACEMENT COSTS :-
Replacement Cost is the money expenditure that has to be incurred for
replacing an old asset.
Private Costs and Social Costs
• PRIVATE COSTS :-
Private Costs are costs actually incurred or provided for by firms and are
either explicit or implicit.
• SOCIAL COSTS :-
Social Cost , on the other hand , refers to the total cost borne by the society
on account of a business activity and includes private cost and external cost.
Fixed Costs and Variable Costs
• FIXED COSTS :-
Fixed or Constant Costs are not a function of output; they do not vary with output upto
a certain level of activity. These costs require a fixed expenditure of funds irrespective of
the level of output. EXAMPLE : rent , property tax , etc.
• VARIABLE COSTS :-
Variable Costs are costs that are function of output in the production period.
EXAMPLE : Wages of casual labourers, Cost of raw materials and Cost of all other inputs
that vary with output are Variable Costs.
Total Costs
• TOTAL COST :-
The total cost of a business is defined as the actual cost that must be incurred for
producing a given quantity of output. The Total Cost is composed of two major
elements namely , Total Fixed Cost and Total Variable Cost.
TC = TFC + TVC
Average Costs and Marginal Costs
•AVERAGE COST :-
Average Cost is the sum of Average Variable Cost and Average Fixed Cost. It is the
Total Cost divided by the number of units produced.
ATC = AFC + AVC
ATC = TC
Q
•MARGINAL COST :-
Marginal Cost is the addition made to the Total Cost by the production of an
additional unit of output.
MC n = TC n – TC n-1
BEHAVIOUR OF COST CURVES
• SHORT RUN COST CURVES :-
• As seen in the figure, The Total Fixed Cost Curve (TFC) is a
Total Cost Curves :- horizontal straight line parallel to X-axis as TFC remains fixed
for whole range of output. The curve starts from Y-axis
showing that fixed costs will be incurred even if the output is
zero.
• The Total Variable Cost Curve(TVC) rises upward indicating
that as output increases, TVC increases , it starts from origin
because variable costs are zero when output is zero. It initially
increases at a decreasing rate and then at an increasing rate
with increase in output.
• The Total Cost Curve has been obtained by adding vertically
the TFC Curve and TVC Curve. The slopes of TC and TVC are
same for each level of output and the two curves have vertical
distance equal to the TFC.
Average and Marginal Cost Curves :-
• The AFC Curve will steadily fall as output increases,
therefore, AFC Curve will slope downwards throughout but
will not touch X-Axis as AFC cannot be zero.
• The AVC Curve will first fall and reach a minimum level due
to occurrence of increasing returns to variable factors and
then it will rise steeply due to diminishing returns.
• The ATC Curve first falls and reaches the minimum level and
then rises as output increases . Hence , the ATC Curve is
U-Shaped.
• LONG RUN COST CURVES :-
Average Cost Curves:-
In the figure, LAC Curve , is to be tangent to
each of the SAC Curves. If a firm decides to
produce any particular output, it then builds
a corresponding plant and operates on the
corresponding SAC Curve.
THANK YOU
