Costs

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  • Costs

    1. 1. Costs: Chapter 7
    2. 2. Economic cost: <ul><li>Explicit cost : the actual out of pocket expenditures incurred by the firm to purchase or hire the services of factors of production. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Economic cost or opportunity cost is the value of the best alternative use of resources. </li></ul>
    3. 3. Short run cost: <ul><li>To make profit maximizing decision, a firm needs to know how its cost varies with output. </li></ul><ul><li>Cost = f (output) </li></ul><ul><li>Whereas </li></ul><ul><li>Output = f (input) </li></ul><ul><li>A firm cannot vary some of its input, such as capital, in short run. </li></ul><ul><li>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. </li></ul><ul><li>To produce a given level of output in the short run, a firm incurs costs for both its fixed and variable inputs. </li></ul>
    4. 4. Short run cost: (total cost) <ul><li>A firm’s fixed cost (F) is its production expense that does not vary with output </li></ul><ul><li>A variable cost (VC) is the production expense that changes with the quantity output produced. </li></ul><ul><li>The variable cost is of the variable inputs: the inputs the firm can adjust to alter its output level, such as labor materials. </li></ul><ul><li>A firm’s total cost is the sum of a firm’s variable cost and fixed cost </li></ul><ul><li>C= VC + F </li></ul>
    5. 5. Marginal curve ; <ul><li>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. </li></ul><ul><li>MC= change in cost / change in output </li></ul><ul><li>Here only one variable is changing therefore; </li></ul><ul><li>MC = change in variable cost / change in output </li></ul>
    6. 6. Average Cost: <ul><li>Average Fixed cost (AFC) </li></ul><ul><li>The fixed cost divided by the units of output produced </li></ul><ul><li>AFC= f/q </li></ul><ul><li>The fixed cost falls as output rises because the fixed cost is spread over more units. </li></ul><ul><li>Average Variable Cost (AVC) </li></ul><ul><li>The Variable cost divided by the units of output produced </li></ul><ul><li>AVC= VC/q </li></ul><ul><li>Because the variable cost increases with output, the AVC may either increase or decrease as output rises </li></ul><ul><li>Average Cost (AC) or Avg total cost: its sum of AVC and AFC </li></ul><ul><li>AC= AFC+ AVC </li></ul>
    7. 7. 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
    8. 8. F Variable cost and Fixed cost Curve
    9. 9. Total cost, Variable cost and Fixed cost Curve
    10. 10. Average Variable cost Cost Quantity 6 4 120 216 20 F C VC AVC Cost per unit Quantity
    11. 12. Average total cost Cost Quantity 6 4 120 216 20 F C VC AVC Cost PER UNIT Quantity AFC AC

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