For the undergraduate course entitled Ag. Econ. 6.4: Farm Management, Production and Resource Economics offered by Junagadh Agricultural University, Gujarat as well as other State Agricultural Universities (SAU's) in India and Land Grant Universities around the globe.

1. Production Costs
• What is production?
The process of converting inputs into output.
• What is production cost?
The amount that is required to produce output i.e.
Cost of all the inputs required to produce output.
- Cost of production.
- Cost of cultivation.
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2. Cost of Production and
Cost of Cultivation
• Cost of producing a unit quantity of output is
Cost of Production. E.g. Rs. / kg.
• Cost of producing output in a unit area is Cost of
Cultivation. E.g. Rs. / ha.
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3. Seven Cost Concept
• TFC : Total Fixed Cost
• TVC : Total Variable Cost
• TC : Total Cost
• AFC : Average Fixed Cost
• AVC : Average Variable Cost
• ATC : Average Total Cost
• MC : Marginal Cost
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6. TC, TVC, TFC

7. AFC, AVC, ATC and MC

8. Classification of Costs
1. Fixed Costs and Variable Costs
2. Explicit Costs and Implicit Costs
3. Direct Costs and Indirect Costs
4. Private Costs and Social Costs
5. Relevant Costs and Irrelevant Costs
6. Separable Costs and Common Costs
7. Opportunity Costs and Actual Costs4/21/2020
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9. Fixed Costs vs. Variable Costs
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10. Explicit Costs and Implicit Costs
• Explicit: ‘that which can be accounted’… ‘ that
which can be recorded in an account book’
It represents actual transfer of money.
E.g. purchase of seeds, fertilizers.
• Implicit: ‘that which cannot be accounted’
‘Assumed costs or hypothetical costs’
E.g. Interest on owned capital, rental value of
owned land, wages of owned family labour.
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11. Direct Costs and Indirect Costs
• Direct: ‘directly attributed to different units of
production’.
‘can be separated’ Also called as ‘prime costs’
E.g. raw materials – seed or NPK, labour.
• Indirect: ‘Cannot be directly attributed to
different units of production’
‘cannot be separated’ Also called as ‘over-head costs’
E.g. depreciation of buildings, electricity charges.
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12. Private Costs and Social Costs
• Private: ‘Accrue directly to the individuals involved in that
activity’.
‘ cannot be passed onto others’
E.g. Farmer’s expenditure on seeds, NPK
• Social : Accrue indirectly to the individuals not involved in
that activity’.
‘passed onto others’ ‘External costs’
E.g. environmental damage costs
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13. Relevant Costs and Irrelevant
Costs
• Relevant: ‘ relevant for decision-making
purposes’ or ‘ costs that incur due to the
present decisions’
• Also called as ‘incremental costs’
• Categories:
1) Present period explicit costs
2) Opportunity costs of the decision
3) Future cost implications due to the decision
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14. Irrelevant Costs
• Costs that have incurred already.
• Costs that will incur in future regardless
of the decision.
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Farmer’s decision to change the cropping from Cotton to
groundnut - Relevant Costs
Cost of storage and marketing of groundnut – Relevant
costs
Cost of farm building, built five years ago - Irrelevant
Cost of deepening the dried well - Irrelevant
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15. Separable Costs and Common
Costs
• Separable: ‘that which can be separated into
different units and attributed to a product’
• E.g. fertilizer, seed
• Common: ‘cannot be separated into different
units and attributed to a product’
• E.g. Salary of permanent labour. Managerial
costs.
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16. Opportunity Costs and Actual
Costs
• Opportunity Costs: OC is the cost equal to the
returns of the next best alternative foregone due to
the present decision in a given time period.
• E.g. Suppose a farmer cultivates wheat in 2 acres
and makes a profit of Rs. 15,000.
Rent of land is Rs. 10000 / acre
Then by not renting, the opportunity cost (income
foregone) is Rs. 10000 * 2 = Rs. 20,000
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17. Solve the Cost Concepts
The total cost (TC) of producing cotton (Q) is
given as: TC = 700 + 16Q.
• What is the TFC?
• What is the TVC?
• What is the AFC?
• What is the AVC?
• What is the ATC?
• What is the MC?
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18. TC = 700 + 16Q
• TFC = 700
• TVC = 16 Q
• AFC = 700 / Q
• AVC = 16 Q / Q = 16
• ATC = (700 + 16 Q) / Q = 700/ Q + 16
• MC = 16
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19. Estimate the following costs:

20. Question Time
Say True or False
• MC cuts AVC and ATC at their maximum. (T/F)
• MPP cuts APP at its minimum. (T/F)
• Fixed costs become changed in the long- run.
(T/F)
• MC decreases, reaches zero and can attain
negative values. (T/F)
• TFC curve is parallel to ‘X’ axis. (T/F)
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21. Say True or False
• AFC curve is upward sloping with increase in
output. (T/F)
• If input applied is 20 kg and output obtained is
200 kg, then TPP will be 100 kg & APP is 50 kg.
(T/F)
• APP can attain negative values. (T/F)
• Ep = APP/ MPP (T/F)
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