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# Costs

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### Costs

1. 1. Costs
2. 2. Short-run costs Total cost
3. 3. Total costs for firm X Output (Q) 0 1 2 3 4 5 6 7 TFC (Rs.) 12 12 12 12 12 12 12 12
4. 4. Total costs for firm X TFC Output (Q) 0 1 2 3 4 5 6 7 TFC (Rs.) 12 12 12 12 12 12 12 12
5. 5. Total costs for firm X TFC Output (Q) 0 1 2 3 4 5 6 7 TFC (Rs.) 12 12 12 12 12 12 12 12 TVC (Rs.) 0 10 16 21 28 40 60 91
6. 6. Total costs for firm X TVC Output (Q) 0 1 2 3 4 5 6 7 TFC (Rs.) 12 12 12 12 12 12 12 12 TVC (Rs.) 0 10 16 21 28 40 60 91 TFC
7. 7. Total costs for firm X TVC TFC Diminishing marginal returns set in here
8. 8. Total costs for firm X TVC Output (Q) 0 1 2 3 4 5 6 7 TFC (Rs.) 12 12 12 12 12 12 12 12 TVC (Rs.) 0 10 16 21 28 40 60 91 TFC
9. 9. Total costs for firm X TVC TFC Output (Q) 0 1 2 3 4 5 6 7 TFC (Rs.) 12 12 12 12 12 12 12 12 TVC (Rs.) 0 10 16 21 28 40 60 91 TC (Rs.) 12 22 28 33 40 52 72 103
10. 10. Total costs for firm X TC Output (Q) 0 1 2 3 4 5 6 7 TFC (Rs.) 12 12 12 12 12 12 12 12 TVC (Rs.) 0 10 16 21 28 40 60 91 TC (Rs.) 12 22 28 33 40 52 72 103 TVC TFC
11. 11. Total costs for firm X TC TVC TFC Diminishing marginal returns set in here
12. 12. Short-run costs Marginal cost = TC / Q
13. 13. Deriving marginal costs Q Costs (Rs.) Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103 10 6 5 7 12 20 31
14. 14. TC Deriving marginal costs Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103 10 6 5 7 12 20 31 Q Costs (Rs.)
15. 15. Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103 10 6 5 7 12 20 31 TC  TC = 12  Q = 1 Q Costs (Rs.) Deriving marginal costs
16. 16. TC MC Q Costs (Rs.) Deriving marginal costs Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103 10 6 5 7 12 20 31 Diminishing returns set in here
17. 17. MC Q Costs (Rs.) Deriving marginal costs Diminishing marginal returns set in here
18. 18. Short-run costs Average cost = TC / Q
19. 19. Q Costs (Rs.)
20. 20. Q Costs (Rs.) AFC Q TVC AVC 0 0 - 1 10 10 2 16 8 3 21 7 4 28 7 5 40 8 6 60 10 7 91 13
21. 21. 3 Q TVC AVC 0 0 - 1 10 10 2 16 8 3 21 7 4 28 7 5 40 8 6 60 10 7 91 13 Q Costs (Rs.) AFC AVC
22. 22. Q Costs (Rs.) AFC AVC Q TC AC 0 12 1 22 22 2 28 14 3 33 11 4 40 10 5 52 10.4 6 72 12 7 103 14.7
23. 23. Q Costs (Rs.) AC AFC AVC Q TC AC 0 12 1 22 22 2 28 14 3 33 11 4 40 10 5 52 10.4 6 72 12 7 103 14.7
24. 24. Q Costs (Rs.) Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103 10 6 5 7 12 20 31
25. 25. MC Q Costs (Rs.) Q TC MC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103 10 6 5 7 12 20 31
26. 26. Q TC MC AC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103 10 6 5 7 12 20 31 MC - 22 14 11 10 10.4 12 14.7 Q Costs (Rs.)
27. 27. Q TC MC AC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7 103 10 6 5 7 12 20 31 MC - 22 14 11 10 10.4 12 14.7 Q Costs (Rs.) AC
28. 28. Average and marginal costs Output ( Q ) Costs (Rs.) AFC AVC MC x AC z y
29. 29. Long-run costs Long-run costs =TC / Q
30. 30. Alternative long-run average cost curves Output O Costs Economies of Scale LRAC
31. 31. Alternative long-run average cost curves Output O Costs Diseconomies of Scale LRAC
32. 32. Alternative long-run average cost curves Output O Costs Constant costs LRAC
33. 33. A typical long-run average cost curve Output O Costs LRAC
34. 34. A typical long-run average cost curve Output O Costs Economies of scale Constant costs Diseconomies of scale LRAC
35. 35. Long-run average and marginal costs Output O Costs LRAC Economies of Scale LRMC
36. 36. Long-run average and marginal costs Output O Costs LRAC Diseconomies of Scale LRMC
37. 37. Long-run average and marginal costs Output O Costs LRAC = LRMC Constant costs
38. 38. Long-run average and marginal costs Output O Costs LRAC Initial economies of scale, then diseconomies of scale LRMC
39. 39. Long-run costs Relationship between short-run and long-run AC curves
40. 40. Deriving long-run average cost curves: factories of fixed size Costs Output O 3 factories 2 factories 1 factory SRAC 3 SRAC 4 SRAC 5 5 factories 4 factories SRAC 1 SRAC 2
41. 41. Deriving long-run average cost curves: factories of fixed size SRAC 1 SRAC 3 SRAC 2 SRAC 4 SRAC 5 LRAC Costs Output O
42. 42. Deriving long-run average cost curves: choice of factory size Costs Output O Examples of short-run average cost curves
43. 43. Deriving long-run average cost curves: choice of factory size LRAC Costs Output O
44. 44. Explicit and Implicit Costs Explicit Costs : The money payment that a firm makes to the outsiders who supply inputs. These are the “out of pocket ” costs. Eg. Salaries, price paid for raw material, components etc.
45. 45. <ul><li>Implicit Costs : The costs of the “self owned” resources which are employed by the firm and are non – expenditure costs. </li></ul><ul><li>Eg. Salary of the proprietor, interest on the entrepreneur’s own investment etc. </li></ul>
46. 46. Economic Profit versus Accounting Profit <ul><li>Economists measure a firm’s economic profit as total revenue minus all the opportunity costs (explicit and implicit). </li></ul><ul><li>Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. In other words, they ignore the implicit costs. </li></ul>
47. 47. Economic Profit versus Accounting Profit <ul><li>When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. </li></ul><ul><ul><li>Economic profit is smaller than accounting profit. </li></ul></ul>
48. 48. Economic Profit versus Accounting Profit Revenue Total opportunity costs How an Economist Views a Firm Explicit costs Economic profit Implicit costs Explicit costs Accounting profit How an Accountant Views a Firm Revenue