The document discusses the concept of cost. It defines cost as the total expenditure incurred by a firm when utilizing economic resources to produce goods and services. It identifies several types of costs such as fixed costs, variable costs, semi-variable costs, and total costs. It also discusses the relationships between different costs such as total, average, and marginal costs. Finally, it examines the differences between short-run and long-run costs and how they relate to the cost-output relationship.

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COST CONCEPT
P r e s e n t i n g b y P a n k a j

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Meaning
I t r e f e r s t o t h e t o t a l e x p e n d i t u r e o f a f i r m
i n c u r s w h e n u t i l i z i n g e c o n o m i c r e s o u r c e s t o
p r o d u c e g o o d s a n d s e r v i c e s .
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Determinant of Cost:
Size of Plant
Level of Output
State of Technology
Management and Administrative Efficiency

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Types of Cost:
Actual Cost
Economic and Accounting Cost.
Outlay and Opportunity Cost
Implicit and Explicit Cost
Incremental and Sunk Cost
Shutdown Cost
Abandonment Cost
Book Cost
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Out of Pocket Cost
Past and Future Cost
Direct and Indirect
Private and Social Cost
Historical and Replacement Cost
Urgent and Postponable Cost
Controllable and Uncontrollable Cost
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Fixed cost

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Variable Cost

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Semi Variable Cost

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Stair Step Cost

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Total Cost
Average Cost
TC= TFC+TVC
AC= Total Cost/Units Produced

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Marginal Cost
The cost incurred on producing one
additional unit of commodity is
known as marginal cost. Thus it
shown a change in total cost when
one more or less unit is produced.
MC= TCn – TC(n-1 )

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Cost Function
The cost output relationship plays an important role in
determining the optimum level of production.
TC=F(Q)
Where,
TC= Total cost
Q= Quantity produced
F= Function
The cost function can be classified as:

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Short Run Cost
Long Run Cost
Short run costs are those which
vary with output when fixed plant
a capital equipments remain
unchanged.
Long run costs are those which
vary with output when all input
factors including plants
equipment vary.

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Cost Output Relationship in Short Run
In the short-run an increase in TC implies an increase
in TVC only.
Thus :
TC = TFC + TVC
TFC = TC – TVC
TVC = TC – TFC
TC = TFC when the output is zero.
The graph shows Short-run cost output relationship.

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Short-run Average Cost and Marginal Cost

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Average fixed Cost (ASF) :
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Average Variable Cost
(AVC):
AVC = TVC / Q
AFC = TFC/Q

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Average Total Cost (ATC) :
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Marginal Cost (MC) :
ATC = TC / Q

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Cost Output Relationship
in the Long Run
T

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Features of LAC curve

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The LAC curve envelopes the SAC curves and is therefore called as envelope curve
The points of tangency on the falling part of SAC curve for points lying to the left of minimum point of LAC
Each point of the LAC is a point of tangency with thecorresponding SAC curve.
The points of tangency occur on the rising part of the SAC curves for the points lying to the right of
minimum point of LAC.
The optimum scale of plant is a term applied to the most efficient of all scales of plants available. This
scale of plant is the one whose SAC curve forms the minimum point of LAC curve. It is SAC3 in our case
which is tangent to LAC curve at its minimum point at R.
Both LAC ad SAC curves are U shaped but the difference between the two U shapes is that the U shape
of the LAC curve is flatter or lesser pronounced from bottom. The main reason for this is that in the long
run such economies are possible which cannot be had in the short run, likewise some of the diseconomies
which are faced in short run may not be faced I the long run.

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Gracias!

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