Costs
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Costs

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Costs Costs Presentation Transcript

  • Costs: Chapter 7
  • Economic cost:
    • Explicit cost : the actual out of pocket expenditures incurred by the firm to purchase or hire the services of factors of production.
    • Implicit cost: the estimated values( in their best alternative employment) of the fa ctors owned by the firm and used in its own production processes.
    • Or the value of the working time of the firm’s owner and the value of other resources used but not purchased in a given period.
    • Economic cost or opportunity cost is the value of the best alternative use of resources.
  • Short run cost:
    • To make profit maximizing decision, a firm needs to know how its cost varies with output.
    • Cost = f (output)
    • Whereas
    • Output = f (input)
    • A firm cannot vary some of its input, such as capital, in short run.
    • As a result , it is usually more costly for a firm to increase output in short run than in long run when input can varied.
    • To produce a given level of output in the short run, a firm incurs costs for both its fixed and variable inputs.
  • Short run cost: (total cost)
    • A firm’s fixed cost (F) is its production expense that does not vary with output
    • A variable cost (VC) is the production expense that changes with the quantity output produced.
    • The variable cost is of the variable inputs: the inputs the firm can adjust to alter its output level, such as labor materials.
    • A firm’s total cost is the sum of a firm’s variable cost and fixed cost
    • C= VC + F
  • Marginal curve ;
    • A firm’s marginal cost (MC) is the amount by which a firm's cost change if the firm produces one more unit of output.
    • MC= change in cost / change in output
    • Here only one variable is changing therefore;
    • MC = change in variable cost / change in output
  • Average Cost:
    • Average Fixed cost (AFC)
    • The fixed cost divided by the units of output produced
    • AFC= f/q
    • The fixed cost falls as output rises because the fixed cost is spread over more units.
    • Average Variable Cost (AVC)
    • The Variable cost divided by the units of output produced
    • AVC= VC/q
    • Because the variable cost increases with output, the AVC may either increase or decrease as output rises
    • Average Cost (AC) or Avg total cost: its sum of AVC and AFC
    • AC= AFC+ AVC
  • Variation Of SR cost with Output: 29.1 24.7 4.4 42 320 272 48 11 27.8 23 4.8 32 278 230 48 10 27.3 22 5.3 30 246 198 48 9 27 21 6 27 216 168 48 8 27 20.1 6.9 21 189 141 48 7 28 20 8 20 168 120 48 6 29.6 20 9.6 18 148 100 48 5 32 20.5 12 16 130 82 48 4 38 22 16 20 114 66 48 3 47 23 24 21 94 46 48 2 73 25 48 25 73 25 48 1 48 0 48 0 Average cost= c/q Average Variable cost= VC/q Average Fixed cost= F/q Marginal cost MC Total cost C Variable cost VC Fixed Cost F Output Q
  • F Variable cost and Fixed cost Curve
  • Total cost, Variable cost and Fixed cost Curve
  • Average Variable cost Cost Quantity 6 4 120 216 20 F C VC AVC Cost per unit Quantity
  •  
  • Average total cost Cost Quantity 6 4 120 216 20 F C VC AVC Cost PER UNIT Quantity AFC AC
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