2. Different types of COST
•
Fixed cost &Variable cost
•
Incremental cost & Sunk cost
•
Real cost & Opportunity cost
•
Explicit cost & Implicit cost
•
Total cost, Average cost & Marginal cost
3. 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
Insurance premiums 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.
4. 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.
5. Real cost & Opportunity cost
REAL COST:
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
OPPORTUNITY COST:
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.
6. Explicit cost & Implicit cost
EXPLICIT COSTS: Explicit costs are direct
contractual monetary payments incurred
through market transactions. Ex: wages and
salaries, power charges.
IMPLICIT COSTS: Implicit costs are the
opportunity costs of the useof factors which a
firm does not buy or hire.Ex: wages of labor
rendered by the entrepreneur himself,interest
on capital supplied by him
7. 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 produced
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)
