Theory of cost

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This is my economics assignment prepared in first year of my Under Graduate program.

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Theory of cost

  1. 1. O F Y R T O S E OT H C
  2. 2. COST It is the firm of the individual operating in a marketing has a influence on the market supply of the commodity. In order to make use of the various factor and non-factor inputs. In common, the amount spend on these inputs is called the cost of production.
  3. 3. CONCEPT OF COST MONEY COST : The amount spend in terms of money for the production of the commodity is known as money cost . NOMINAL COST: It is the money cost of production. REAL COST : It is the mental and physical and sacrifices undergone with a view to producing a commodity .
  4. 4.  OPPORTUNITY COST : The real concept of production of given commodity is the next best alternative sacrificed in order to obtain that commodity.
  5. 5.  IMPLICIT COST : It is the cost of self-owned resources such as salary of proprietor. EXPLICIT COST : * It is the paid-out cost. * It means payments made for the productive resources purchased.
  6. 6.  ACCOUNTING OR BUSINESS COST: Cash payments which firms make for factor and non-factor input depreciation other book keeping entries.• SOCIAL COST: It is the amount of cost the society bears due to industrialization.• ENTREPRENEUR’S COST: The cost of production in the sense of money cost or expenses of production.
  7. 7. CLASSIFICATION OFENTREPREUNER’S COST PRODUTION COST. SELLING COST. OTHER COST. MANAGERIAL COST.
  8. 8. ELEMENTS WAGES. INTEREST. RENT. COST OF RAW MATERIALS. REPLACEMENT AND REPAIRING. DEPRICIATION. PROFITS.
  9. 9. SHORT-RUN COSTS In the short run atleast one factor of production is fixed. Output can be varied only by adding more variable factors.
  10. 10.  PRIME COSTS: Some costs vary more proportionately with the output,while others are fixed and do not vary output in the same way. SUPPLEMENTARY COSTS: Some costs vary less proportionately with the output,while others are fixed and do not vary output in the same way.
  11. 11. FIXED COST Remains constant. Also known as short-run cost. This cost includes: *Cost on managerial staff. *Expenditure on depeciation. *Maintenance cost of the factory.
  12. 12. VARIABLE COST Vary directly with the level of output Used in the actual production process. Functions of output changes. Eg: Cost of raw-materials. Cost in direct labour.
  13. 13.  TOTAL COST: Sum of total fixed cost and total variable cost. TC=TVC+TFC. TVC=0, when the output is zero and increases with increase in the output.
  14. 14. AVERAGE COST They are of three types. *Average fixed cost. *Average variable cost. *Average total cost.
  15. 15. AVERAGE FIXED COST: It is the per-unit cost of the fixed factors. AFC=TFC/Q.AVERAGE VARIABLE COST: It is the per-unit cost of the variable factors. AVC=TVC/Q.
  16. 16. AVERAGE TOTAL COST * It is the total cost divided by the numberof units produced. * Sum of average fixed cost and averagevariable cost. ATC=TC/Q. AC=AFC+AVC.
  17. 17. CHANGES INVARIABLE COST
  18. 18. CHANGE IN FIXED COST-NO EFFECT
  19. 19.  MARGINAL COST: Change in the the total cost resulting from the unit change in the quantity produced. MC=Change in Q/Change in TC.
  20. 20. SHORT RUN COSTSOF PRODUCTION
  21. 21. LONG-RUN COST CURVES It is a period of time during which the quantities of all factors,variable as well as fixed can be adjusted.
  22. 22.  LONG-RUN AVERAGE COST CURVE: Slopes downwards. Larger scope of specialization of labour. Increasing use of specialized machinery. Other technological management.
  23. 23.  LONG-RUN MARGINAL COST CURVE: Cuts the LRAC at the lowest point. It is equal to the LRAC when LAC is neither rising nor falling.
  24. 24. ANKUTH

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