Fixed cost &Variable cost
Fixed cost :Fixed cost are those cost That are incurred
as a result of the use of fixed factor inputs. They remain
fixed at any level of output in the short run.
E.g.: payments of rents for building
Depreciation & maintenance allowance.
Variable cost: Variable cost are those cost that are
incurred by the firm as a result of the use of variable
factor inputs. They are dependent of the level of input.
E.g.: prices of raw material
Fuel and power charges.
Incremental cost & Sunk cost
Incremental cost :It can be defined as the cost of change
in the level of nature of activity. The amount by which the
total cost increases when output is expanded by one unit. It
can be also be calculated by dividing the change in total cost
by one unit change in output.
Sunk cost: refer to those costs which are not altered or
changed with a change in the level of nature of activity. This
is the cost which cant be recover that is called as sunk cost.
Total cost, Average cost & Marginal cost
Total cost:Total cost is the aggregate of expenditure
incurred by the firm in producing given level of output.
Total cost is measured in relation to the production
function by multiplying factor prices with their quantities.
total cost=total fixed cost + total variable cost
Average cost :Average cost of production is the total cost of
production divided by units produced.
average cost=total cost of production/number of units
Marginal cost :
Marginal cost is the cost of producing an extra
unit of output. The marginal cost is also per unit cost of
production. It is the addition made to the total cost by
producing one more unit of output.
marginal cost = total cost(n) –total cost (n-1)
The term real cost of production refers to the
physical quantities of various factors used in
producing a commodity.
Ex: real cost of a table is composed of a carpenter’s
labor, two cubic feet of wood, a dozen of nails, half a
bottle of varnish etc
The sacrifice or loss of alternative use of a given
resource is termed as opportunity cost. Thus the opportunity
cost is measured in terms of the forgone benefits from the next
best alternative use of a given resource.
Ex: The opportunity cost of managing once own business the
salary that he could earn in other occupations.
Explicit costs are direct contractual monetary
payments incurred through market transactions.
Ex: wages and salaries, power charges.
Implicit costs are the opportunity costs of the
use of factors which a firm does not buy or hire.
Ex: wages of labor rendered by the entrepreneur
interest on capital supplied by him.
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