Analysis of cost

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Analysis of cost

  1. 1. Analysis of Cost
  2. 2. <ul><li>What is Cost? </li></ul><ul><li>Why we need to analyze the cost, </li></ul><ul><li>“ its Importance for an economist” </li></ul><ul><li>Different Dimensions/Types of cost </li></ul><ul><ul><li>Total Cost </li></ul></ul><ul><ul><li>Fixed Cost </li></ul></ul><ul><ul><li>Variable Cost </li></ul></ul><ul><ul><li>Marginal Cost </li></ul></ul><ul><ul><li>Average Cost </li></ul></ul><ul><li>Relationship between Economic Cost and Business Accounting. </li></ul><ul><li>Numerical calculation of TC,VC,FC,AVC and MC </li></ul><ul><li>Question Answer Session </li></ul>Areas to be covered in this discussion
  3. 3. What is Cost ?????? <ul><li>‘ Price of the inputs is called Cost’’ </li></ul><ul><li>Cost merely means The exchange price associated with business transaction at the point of recognition. Cost is the net purchase price plus all reasonable and necessary expenditures to get the asset in place and ready for use. </li></ul><ul><li>As used by the economist, the term cost includes not only the usual business costs as presented by the accountant, ie, the recorded costs of production and distribution, but a &quot;normal&quot; or competitive profit as well </li></ul>
  4. 4. Why we need to Analyze the economic cost ??? <ul><li>Profit = Total Revenue – Total Cost </li></ul><ul><li>TR=the amount the firm receives for the sale of output </li></ul><ul><li>TC=the amount the firm pays to buy the inputs into production </li></ul>
  5. 5. Raw Material Labor Capital Combination of Inputs OUT PUT Product Marketing Land REVENUEProfit First Combination Price Of The Inputs Is Cost
  6. 6. Raw Material Labour Capital Combination of Inputs OUT PUT Product Marketing Land REVENUEProfit Second Combination
  7. 7. Raw Material Labour Capital Combination of Inputs OUT PUT Product Marketing Land REVENUEProfit Third Combination
  8. 8. Dimensions/Types of Cost <ul><li>Total Cost TC= FC+VC </li></ul><ul><li>Fixed Cost = FC </li></ul><ul><li>Overheads/Sunk cost </li></ul><ul><li>Marginal Cost =MC </li></ul><ul><li>Variable Cost = VC </li></ul>
  9. 9. <ul><li>Difference between </li></ul><ul><li>Accountant and Economist profit </li></ul>Economic Profit Implicit cost Explicit cost Accounting Profit Explicit Cost Accountant view Economist view Total Revenue Total Opportunity cost Total Revenue
  10. 10. Dimensions/Types of Cost <ul><li>Average Cost =AC=TC/q </li></ul><ul><li>AFC=FC/q </li></ul><ul><li>AVC=VC/q </li></ul>
  11. 11. Calculation of optimal Level 53.13 6.88 60.00 110 480 425 55 8 45.00 7.86 52.86 90 370 315 55 7 37.50 9.17 46.67 70 280 225 55 6 31.00 11.00 42.00 50 210 155 55 5 26.25 13.75 40.00 30 160 105 55 4 25.00 18.33 43.33 20 130 75 55 3 27.50 27.50 55.00 25 110 55 55 2 30.00 55.00 85.00 30 85 30 55 1 infinite infinite infinite infinite 55 0 55 0 AVC AFC AC MC TC=FC+VC VC FC Quantity
  12. 12. Graphical Representation of optimal Level
  13. 13. Some Important points <ul><li>Economies of scale </li></ul><ul><li>Diseconomies of Scale </li></ul><ul><li>Constant Returns to scale </li></ul>

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